Asset Buying vs. Stock Sale: What’s the Difference? What Should I Do?
When you acquire a company, the process is significantly more involved than purchasing real estate or other property. There are more options, more nuances, more regulatory issues to consider, more taxation concerns to keep an eye on, and more opportunities for unexpected liability. One of the most important decisions the parties must make is whether the buyer will be purchasing the entity itself by way of a stock sale, or whether instead they will acquire only the business assets. Continue reading to learn about the difference between an asset sale and a stock sale in Illinois, and speak with a seasoned Chicago business purchase and sale law firm for advice and assistance.
What Is an Asset Purchase vs. a Stock Purchase?
In an asset purchase, the buyer is acquiring specific assets (and liabilities). Assets include tangible assets such as fixtures, real estate, equipment, and merchandise, as well as intangibles such as trade secrets, licenses, and accounts payable and receivable. The acquired assets and any associated liabilities move to the buyer’s entity, and the seller should consult with tax and legal counsel to determine whether the seller’s old entity (along with any remaining assets and liabilities) should be wound down.
In a stock purchase, also known as an entity purchase, the buyer acquires the target’s outstanding shares (usually all outstanding shares). The buyer is legally acquiring the entire company. That means the buyer is taking on all of the target’s assets, rights, and liabilities, including undisclosed or unknown liabilities.
Pros and Cons of an Asset Purchase
An asset purchase allows the buyer to cherry-pick which assets to acquire. The buyer has greater flexibility and assumes less risk because they have more control over which liabilities to accept. They can choose to leave out certain assets, even as specific as certain customer accounts, in order to avoid issues. Asset purchases can also generate significant tax benefits, especially if the assets are highly depreciated.
Asset purchases can, however, be more complex. Terms must be drawn to specifically account for the assets and liabilities being acquired vs. those that are not. Employment agreements and customer contracts might need to be renegotiated and re-executed because the target business will cease to exist. Such a change in ownership can also undermine customer confidence and create other hassles.
Pros and Cons of a Stock Purchase
Stock purchases tend to be simpler: The buyer takes everything. No specific assets need to be addressed. The deal documents simply outline the terms of the sale and provide for the transfer of ownership. If the target business appears solid and is expected to continue as a going concern for the foreseeable future, a stock purchase could be ideal. Stock sales also offer more favorable tax treatment for the seller.
The drawback of a stock purchase is the other side of the simplicity coin: The buyer takes everything. The buyer acquires all assets, whether they are useful or not. The buyer becomes responsible for all known and unknown liabilities. Buyers also lose out on some of the tax benefits of an asset purchase.
Ultimately, the specific nature of the business and the parties involved will dictate which option is better. Discuss your options with your mergers and acquisitions attorney, whether you are selling, buying, or merging.
Due Diligence Is Important Either Way
Regardless of whether you are pursuing an asset purchase or a stock purchase, it’s important to conduct proper due diligence before the transaction. The buyer should gather all relevant information about the seller to identify and deal with any issues that may arise. The parties should account for any transfer or procedural issues.
In an asset sale, the buyer should evaluate the nature, condition, and any liabilities associated with the assets being acquired. In a stock sale, the buyer should identify any and all liabilities, ensure key contract terms are acceptable, ensure the target’s right to make the sale (shareholder approvals, Board approvals, etc.), and evaluate the nature and condition of the seller’s assets.
Seasoned Illinois Entity Acquisition Lawyer Ready to Help You Through Your Business Transaction
If you’re purchasing or selling a business entity in Illinois, contact a business purchase and sale lawyer who can offer the individualized guidance you need to make the decisions critical to the success of your enterprise. Call a thorough and professional mergers and acquisitions lawyer at MacDonald, Lee & Senechalle, Ltd. for a consultation, in Hoffman Estates at 847-310-0025, or in Des Plaines at 847-298-5030.