Equity Purchase vs. Asset Purchase

November 27, 2023

by a searcher from Brigham Young University in Salt Lake City, UT, USA

I'm working on a deal right now where the seller has offered to structure the transaction as an equity purchase rather than an asset purchase. I would love to hear the pros and cons of an equity purchase. Important note: the seller will remain liable for all long-term liabilities.

Thanks!

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Reply by an intermediary
from Clemson University in Raleigh, NC, USA

This is a common issue that needs to be more accurately explained. There are two areas to focus on. The first is legal. When buying a company's stock, the buyer assumes all known and unknown liabilities of the company incurred pre-transaction. If a bill from six months ago shows up, you're on the hook for it. This can be papered around with indemnifications. The second cannot be and that is tax treatment. When buying assets the buyer is able to 'write them up' to the value in the allocation table and depreciate them again. In a stock sale the buyer 'steps into the shoes' of the seller and adopts the existing balance sheet and depreciated values (losing the deduction). I have never experienced a shareholder issue like Alan mentioned as virtually all transactions are for 100% of the stock and thus the prior cap table is irrelevant.

Reply by an intermediary
from Naval Postgraduate School in Bellevue, WA, USA

M&A 101: An equity/stock purchase involves purchasing the assets and liabilities of the company. Except to the extent mitigated by Reps and Warranty insurance and provisions of the stock purchase agreement, this means that the buyer is responsible for the unforseen liabilities associated with the prior performance of the company (Suzy/six months after closing sues the company for sexual harassment by the previous owner). In an asset purchase (by a new entity), the liabiilities remain with the seller. Because of this, equity acquisitions are often valued less than an asset transaction.

There are different tax ramifications associated with each option such that a stock sale (for a lower price) might be considered. Consult attorney and CPA for analysis of your particular situation.

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