Deciding to buy a business is more involved than writing a check and taking a set of keys. The way the deal is structured can affect what the buyer receives, which liabilities may come with the business, and what happens after closing. Existing contracts, debts, lawsuits, intellectual property, equipment, and other obligations can all become important when structuring an M&A transaction. That's why the asset vs stock purchase decision deserves careful consideration. For anyone entering an M&A deal, getting that structure right deserves attention before the paperwork is signed.

Key Takeaways

• In an asset purchase, the buyer takes over ownership control of specific business assets.
• In a stock purchase, the buyer purchases ownership shares or equity in the business.
• Both transaction structures require due diligence.
• Neither structure is universally better than the other.

What Is an Asset Purchase?

One method for taking over a business is to focus on the assets that the business owns. During an asset purchase, the buyer will purchase specifically identified assets. This could include:

• Equipment
• Inventory
• Intellectual property
• Customer lists
• Goodwill
• Real estate
• Contracts and other business property

The purchase agreement should specifically outline which assets are to be bought and which assets are to be excluded from the purchase. The buyer generally has more ability to select what they are acquiring instead of simply stepping into ownership of the entire existing company. Once the purchase is completed, the buyer takes over ownership of the assets. The purchase agreement should also identify which liabilities the buyer will assume and which will remain with the seller, although certain liabilities may still apply to the buyer under applicable law.

What Is a Stock Purchase?

When a buyer chooses to make a stock purchase, they are purchasing the owner’s shares or other equity interest in the company. The result is the buyer becoming the new owner of the company. The company remains responsible for all business assets and liabilities. There is generally no need to individually transfer every company asset because the company continues to own them. Depending on the type of business and its governing documents, the transaction may also require approval from shareholders or other owners.

Asset vs. Stock Purchase: Key Differences

Due diligence is essential to any business transaction, no matter how you decide to structure the transaction. It’s during this phase that buyers and sellers can fully understand the potential impact of an asset vs stock purchase. Consulting with a business attorney can provide valuable guidance.

Here are some of the key differences between an asset vs. a stock purchase:

Assets

One of the most important differences is what the buyer ultimately gains control of. When completing an asset purchase, the buyer acquires specific business assets. The buyer can negotiate which assets are included and excluded. This is different from a stock purchase where the company remains an independent legal entity with ownership over the assets.

Liabilities

The buyer in an asset purchase can have the agreement specifically exclude certain company liabilities. However, an asset purchase agreement may not be able to eliminate every possible liability. For example, a liability may be tied to a specific asset the buyer has agreed to purchase. The buyer may be required to take on the liability in order to acquire the asset.

The buyer doesn’t have the same level of flexibility with a stock purchase. In this transaction structure, the company remains the legal owner of the assets and liabilities. So when the buyer obtains their ownership agreement, they cannot stipulate that certain assets or liabilities be excluded from the agreement.

In both transaction structures, due diligence is critical for identifying assets and liabilities. A mergers and acquisitions lawyer can assist with reviewing litigation, contracts, liens, employment matters, taxes, regulatory issues, and other potential liabilities.

Contracts

Transferring ownership can be more complicated during an asset purchase. Individual contracts may need to be updated to complete a legally enforceable assignment or transfer. Some contracts may require consent from the other contracting party before assignment. This process can be simpler during a stock purchase. The company remains the contracting party. Generally, these contracts remain with the company and don’t require transfer or assignment. However, some contracts may contain change-of-control provisions that still require attention.

Taxes

The tax liabilities for the buyer and seller of an asset purchase can differ significantly from a stock purchase. An asset purchase can also affect the buyer's tax basis in the assets. Tax basis is essentially the starting value the tax rules use to determine things such as depreciation, gain, or loss. The buyer's basis is generally based on what it paid for the assets, plus certain liabilities it assumes and other qualifying costs. The parties may also need to allocate the purchase price among the acquired assets, which can affect the tax treatment of the transaction.

A stock purchase may be more favorable for sellers from a tax perspective. The transaction is generally taxed at the shareholder level. An asset purchase, depending on how the business is structured, can result in taxes at both the business and shareholder levels. That potential for double taxation can make a stock purchase more attractive to sellers.

Which Is Better: An Asset Purchase or Stock Purchase?

One transaction structure isn’t inherently better than the other. Instead, the better option ultimately depends on the goals of the buyer and seller. An asset purchase may make sense when the buyer wants specific assets or wants to limit the liabilities it assumes. A stock purchase may make sense when preserving the existing corporate structure, contracts, licenses, or business relationships is important. Speaking with a mergers and acquisitions lawyer can help buyers and sellers understand the potential impact of each structure.

Several factors should be considered when determining whether an asset vs. stock purchase is the better option:

• Type of business
• Assets involved
• Existing liabilities
• Contracts and consent requirements
• Ownership structure
• Tax consequences
• Financing
• Regulatory requirements
• Desired post-closing operations

Talk to an Oklahoma M&A Attorney

Before you put ink to paper with your signature, carefully evaluate the terms of your business purchase. The structure you choose will impact the business long after closing. If you're negotiating an acquisition in Oklahoma, an M&A attorney can help you assess the risks and determine which structure best fits the transaction. The attorneys at Titus Hillis use their decades of experience to advise professionals on making strategic mergers and acquisitions. Schedule a consultation with us today to discuss your next business venture.