When it comes to making a big purchase, there are two main options: asset purchase and stock purchase. Each has its own set of pros and cons, so it’s important to weigh your options carefully before making a decision. Here’s a quick rundown of the pros and cons of each option to help you make the best decision for your situation.
The Pros of an Asset Purchase
An asset purchase is the outright purchase of the assets of a company, with the buyer typically taking on no liabilities of the seller. An asset purchase can often be structured to allow the buyer to cherry pick the assets they want and leave behind any they do not want. This can be very helpful if there are certain liabilities associated with certain assets that the buyer does not want to assume. An asset purchase can also often be structured such that only certain assets and liabilities are assumed by the buyer, giving the buyer greater control over what they are taking on.
The Cons of an Asset Purchase
There are a few potential drawbacks to an asset purchase that should be considered before moving forward:
- It can be more expensive. When you purchase a company’s assets, you’re typically paying a higher price than you would if you were just buying the stock.
- It can take longer. An asset purchase usually takes longer to complete than a stock purchase because there are more negotiations and paperwork involved.
- You might not get everything you want. In an asset sale, the seller gets to choose which assets are included in the sale. This means that you might not end up with all of the assets you were hoping for, or that some of the assets you do receive might not be as valuable as you thought they would be.
- The seller can continue to compete with you. Even if you purchase all of a company’s assets, the seller is still free to start up another business and compete with you directly. In a stock purchase, on the other hand, the seller would no longer have any ownership stake in the company and would be prohibited from competition by contractual agreements
The Pros of a Stock Purchase
There are a few key advantages to acquiring a company by purchasing its stock, as opposed to purchasing its assets. One advantage is that, generally speaking, it is easier
and faster to negotiate a stock purchase than an asset purchase. With a stock purchase, the buyer simply needs to agree on a price with the seller, and the transaction can be completed relatively quickly.
Another advantage of a stock purchase is that the buyer can more easily avoid liability for the seller’s debts and other liabilities. When assets are purchased, the buyer typically assumes responsibility for all of the seller’s debts and liabilities. However, when a company is purchased through a stock purchase, the buyer typically does not assume responsibility for the seller’s debts and liabilities. Finally, a stock purchase may allow the buyer to obtain certain tax benefits. For example, if the shares of the target company are acquired at a price below the company’s book value, the difference between the price paid and the book value may be able to be used as a tax deduction.
The Cons of a Stock Purchase
There are some potential drawbacks to a stock purchase that should be considered before moving forward with this type of transaction. One downside is that a stock purchase usually results in the buyer assuming all of the target company’s liabilities. This can be a major problem if the target company has a large amount of debt or is facing potential litigation.
Another negative aspect of a stock purchase is that the buyer will not have the opportunity to choose which assets and liabilities they want to take on. In an asset purchase, the buyer can hand-pick which assets and liabilities they want to include in the deal. This is not an option with a stock purchase. Finally, it is important to keep in mind that a stock purchase will usually take longer to complete than an asset purchase. This is because a stock purchase requires approval from the target company’s shareholders, which can take time.