When a client asked if I would help him sell his business, he told me that he was ready to go and already had a buyer. I followed that up with "is it a stock deal or an asset deal", and his face went blank. Most acquisitions are done with one of two structures: either the buyer purchases all of the assets of a business out of the selling company, or the buyer purchases all of the ownership interest (i.e. stock, membership interests, etc.) and takes over the company, which can either continue as a subsidiary or can be merged into the buyer or related entity. If the selling company is not a corporation or an LLC, then the deal has to be for assets. Which one is right for your business? Each has its pros and cons.
In an asset deal, the buyer is paying cash, stock, or other property for all of the assets that the seller uses in the operation of the business - everything from equipment, to Web sites, to trademarks, copyrights, and patents, to contracts. The benefit to the buyer is that it does not have to buy any of the liabilities of the seller, or any bad assets for that matter. For example, if someone has a claim to sue the seller for something that occurred prior to the sale, that will remain the seller's responsibility. Likewise, if the seller has debt or other obligations outstanding at the time of close, none of that passes to the buyer unless expressly agreed (sometimes, the buyer will, as part of the purchase price, assume some outstanding debt or other obligations, like a real estate lease or mortgage). Plus, the buyer gets a stepped up basis in the assets it is buying which will be advantageous when selling the assets later and for amortizing the assets over a period of years. The down side to an asset deal is that everything that gets transferred has to be assigned. For most of the basic assets of the company, that is easily done through a bill of sale. But for certain contracts, capital equipment, vehicles, Web sites and other registered intellectual property, and leases, some sort of assignment has to be made, which may include getting consent from the current contract holder or entering into an amendment to the original contract. That can often slow down a deal. It is frustrating to all of the parties when a $25 million transaction is being held up because we don't have a signature of a landlord on a lease assignment (which does happen).
If, on the other hand, the buyer purchases all of the stock of the seller, in a way, it is simpler conceptually because you eliminate the need to transfer the assets. The selling company still owns it all after the closing - the only change is that the company has new owners. But in addition to keeping all of its assets, it also keeps all of its liabilities, even if they are not known at the time of the closing. This may cause a bit of heartburn for the buyer, and may lengthen the negotiation process because there will be more focus on the representations and warranties and indemnification provisions in the final agreements (which I will cover is a later post). On the tax side, the seller can enjoy significant tax benefits at capital gains rates, but the buyer loses the benefit of depreciation that it would have had in an asset deal. The bottom line is that a stock sale benefits the seller more than the buyer.
Putting all of that together, sellers will generally push for a stock sale and buyers will typically want an asset sale. But at the same time, either can be an acceptable structure depending on the nature of the deal. That is just where the negotiation begins.