Asset Purchase vs. Stock Purchase – Term Sheet & Agreement Templates.
Asset Purchase vs. Stock Purchase Advantages and Disadvantages.
When deciding to buy or acquire a business, the purchaser must decide if the deal will be to purchase the assets of the business, or the stock. An asset purchase involves the purchase of the selling company’s assets — including machinery, capitalized software, facilities, vehicles, equipment, and stock or inventory. A stock purchase involves the purchase of the selling company’s shares only. The asset purchase can leave liabilities with the seller while the stock purchase takes on both the liabilities and the assets in the transaction.
Sole Proprietorship, Partnerships and LLCs
When buying a sole proprietorship, a partnership, or a limited liability company (LLC), one cannot execute a a “stock sale.” Why? Because none of these entity structures have stock because of how they are structured at formation. In these cases, owners can sell their partnership or membership interests as opposed to the entity selling its assets. However, if the business is a C-corporation or S-corporation? The buyer and seller must decide whether to structure the deal as an asset sale or a stock sale.
|ADVANTAGES of an Asset Purchase Compared to a Stock Purchase||DISADVANTAGES of an Asset Purchase Compared to a Stock Purchase|
|In an asset acquisition, the buyer is able to specify the liabilities it is willing to assume, while leaving other liabilities behind. In a stock purchase, on the other hand, the buyer purchases stock in a company that may have unknown or uncertain liabilities.||It is necessary for the selling company’s assets to be re-titled in the name of the buyer. This is not required in a stock transaction.|
|If the purchase price exceeds the aggregate tax basis of the assets being acquired, the buyer receives a stepped-up basis in the assets equal to the purchase price.||In a stock transaction the buyer can normally obtain the selling company’s non-assignable contracts, permits, and licenses without the consent of the other party to the contract, permit, or license.|
|By purchasing assets rather than stock, the buyer avoids the problems presented by minority shareholders who refuse to sell their shares.||Asset purchases do not qualify for tax treatment as a tax-free reorganization.|
|Purchasing a business through an asset acquisition is less complicated from a securities law perspective because the parties are not normally required to comply with state and federal securities laws and regulations.||If the selling company does not have a large number of shareholders, a stock transaction will normally be less complicated.|
|Goodwill can be amortized by the buyer for tax purposes over a period of fifteen years.||In states that impose sales or transfer taxes on the sale of assets, a stock transaction can avoid some or all of these taxes that apply in the event of an asset transaction.|
Term Sheet & Agreement Special Considerations
It’s important to note in an asset purchase transaction, it is not necessary for the buyer to purchase all of the assets of the company. In fact, it’s common for a buyer to exclude certain assets. Provisions of an asset purchase term sheet may include payment of purchase price, monthly installments, liens and encumbrances on the assets, condition precedent for the closing, etc.
An asset purchase agreement differs from a stock purchase agreement where company shares, title to assets, and title to liabilities are also sold. In an asset purchase agreement, the buyer must select specific assets and avoid redundant assets. These assets are itemized in a schedule to the agreement. The buyer in a stock purchase agreement is purchasing shares of the company. In this case, itemization is not necessary due to transfer of company’s ownership occurs as is.