Asset Purchase Agreement vs Stock Purchase Agreement

searcher profile

September 14, 2023

by a searcher in Dallas, TX, USA

Any recommendations on when to use a stock purchase agreement versus an asset purchase agreement? I acknowledge the asset purchase agreement is the preferred approach.

Your thoughts?

0
18
239
Replies
18
commentor profile
Reply by a professional
from Howard University in Los Angeles, CA, USA
Hi, I am a corporate attorney who specializes in M&A and am happy to answer any questions you may have about deal structuring.

Asset Purchases
Whether to choose an asset transaction often depends on whether the sale involves only part of a business. In addition, it may be the only option if the seller is selling a product line that is not ran as a subsidiary of the parent company. Asset deals also provide advantages:

(1) Where the seller will realize a meaningful taxable gain from the sale (i.e., where the “tax basis” of the assets in the target is materially lower than the price it is sold at), the buyer generally will obtain significant tax savings from structuring the transaction as an asset deal. This “steps up” the assets’ basis to the purchase price.

(2) An asset’s tax basis is the value at which the taxpayer carries the asset on the tax balance sheet, initially its historical cost to the taxpayer.

(3) Conversely, if the seller realizes a tax loss, a stock transaction is probably better than an asset purchase because the buyer will inherit the tax history of the business and keep the old high basis.


Stock Purchases
Stock transactions are appropriate when: (1) an asset deal will cost too much tax wise; (2) an asset deal will require unobtainable or costly third-party consents; or (3) the size of the company makes an asset deal too inconvenient, time-consuming, or costly.

Sellers often prefer a stock deal because the buyer will take the corporation’s entire business including all of its liabilities, but this effect is countered by the fact buyers seek indemnification against undisclosed liabilities.

There are also two major disadvantages to stock deals: (1) stockholders may be able to veto the transaction and (2) a stock transaction lacks tax basis step up that an asset deal has. (However, you still may be able to have a stock deal be treated as an asset transaction for federal income purposes. Check with a tax professional though.)
commentor profile
Reply by an intermediary
from University of Wisconsin in Lawrence, KS, USA
It is not a simple answer. It depends on many things. Buyers typically like asset deals whereas sellers typical prefer stock transactions. But that is just the begin. Buyers take on seller liabilities with SPAs, but usually it is more tax favorable for seller. If the business is fixed asset heavy, buyers are going to insist on an asset deal so they write up and redepreciate the assets, whereas he can't do that with a stock deal. Those are only two. Then here is section 338 (h) transactions where it is stock deal for each of transfer of contract, employees, etc but the buyer can treat the fixed assets as if it were an asset sale for depreciation purposes. And then there are "state law mergers" which have pros and cons, but these are usually only for two companies of some similar size.. the point it that every deal is unique and APAs fit one type and stock purchases fit another. Depends on tax issue, how risky the deal is from a transfer liability standpoint, etc. We have templates for all types of transactions.
commentor profile
+16 more replies.
Join the discussion