Mergers & Acquisitions: Sale of Stock vs. Sale of Assets
Are you in the market to buy or sell a business and haven’t considered yet whether you are going to pursue a purchase or sale of stock or interests or a purchase or sale of assets. Many buyers prefer to purchase assets whiles many sellers prefer a sale of stock or interests. The decision is based partly on liability and tax considerations, and ultimately the final valuation as affected by the form of the transaction. Thus, the most desirable structure will depend in large part on whether you are a seller or a buyer.
Anytime you want to buy or sell a business, you will encounter several unique challenges. Much has been written on this topic. For this post, I just want to summarize a few significant aspects of both.
Sale of Stock or Shares
In a stock or share sale, the stockholders / shareholders of the company sell their ownership interests to a new individual or entity, the purchaser. The negotiation of the purchase and sales agreement can be tedious and time consuming for both buyer and seller. Many sellers do not have the extra in-house capacity to handle the intensity of a sales process and employ outside counsel, CPA’s or other tax professionals and other service providers. Once the sale is complete, the purchaser controls the governance and operations of the business. In the acquisition of stock or shares, the assets continue to be owned by the company that is purchased.
In this way the purchaser acquires existing licenses, contracts, and permits without having to go through extra steps (although even in this context, many agreements will retain consent rights on a change in control of the entity to be sold). This also means the purchaser will be bound to contracts they do not wish to keep. The purchaser also generally assumes all accounts, debts as well as most liabilities, although certain allocations of the assets and liabilities can be negotiated, and some can be back-stooped by certain insurance products.
In an asset sale, a company sells its assets to the purchaser who then uses those assets to operate a completely new company, even though this may be accomplished under the same name, in the event the name and certain rights are included in the acquisition. In this situation, ownership of the company selling assets does not change hands, just the assets in question.
This allows a buyer to cherry pick the parts of the target company that they are most interested in as well as pick and choose which contracts they take over. Additionally, the purchaser has the option of picking and choosing with debts/liabilities it wishes to assume.
The main advantage here for the buyer is their ability to avoid buying parts of the business they either are not interested in or that are demonstrated to be unprofitable.
As you can see, though their surface differences are relatively simple, the difference between an asset sale and a stock or share sale are quite complex. If you are considering selling your company and have any additional questions or wish to discuss other related legal issues, call Stephen Rizzieri at 214.434.1017 or fill out the form on our law firm site today.