Asset Purchase vs Stock Purchase

In mergers and acquisitions (M&A), the transaction can be structured in two ways: either the purchase and sale of company assets or a purchase and sale of company shares.

When buying an established firm, the buyer, also known as the acquirer, must decide whether they want to buy the company's stock or its assets.

Asset purchases entail purchasing a company's assets, including buildings, automobiles, equipment, inventory, and goodwill. Stock purchases refer to buying shares of the selling business.

Asset deals occur when the buyer acquires the target company’s operating assets. The seller retains complete business ownership following an asset transaction, and no business ownership is transferred to the buyer.

The buyer can stipulate which assets and liabilities will be acquired in an asset purchase. An asset deal consists of many sales of each asset and agreed-upon liabilities.

Because the buyer can choose whether and how many liabilities to acquire in an asset transaction, they only assume the risk associated with those assets and liabilities acquired.

In contrast, the buyer purchases the entire firm with all its assets and liabilities in a stock deal. 

The deal's structure may significantly impact prospects for both buyers and sellers.

Decisions are often influenced by factors such as a company's industry and legal framework. 

To fully comprehend the legal concerns and reach a formal agreement to accomplish the primary goal of both the buyer and the seller, both parties should speak with the acquisition professionals before a deal.

Asset

An economically important resource held or under the authority of a person, company, or nation is an asset. An asset is anything that produces positive economic value. If the value of your company's equity rises, it results from assets' added worth.

Assets for individuals like you and me include our check and savings accounts, retirement accounts, equity in a home or other piece of property, automobiles, and whatever stock we have in a company, whether public or private.

For a business, assets are a crucial element of financial stability. In the company's balance sheet, assets are disclosed and are a component of the fundamental accounting equation:

Equity + Liabilities = Assets

Assets are reported on a company's balance sheet in financial accounting. They are bought or created to boost a company's worth or help its operations by generating cash flow, cutting costs, or boosting upcoming sales.

Both tangible and intangible assets are considered assets. They can be sold now or in the future. They can also be used in how businesses run daily.

Whether it is manufacturing equipment or patents, an asset can be viewed as anything that will generate cash flow, lower expenses, or increase sales in the future.

Types of Assets

Assets are reported on a company's balance sheet, and they can be categorized in four ways:

• Current Assets

Current assets are assets that will be realized within a year. Therefore, they are considered liquid as they normally have a high potential for fire sales and money conversion.

Cash is considered to be the most liquid financial asset. Other current assets include receivables, bonds, mutual funds, stocks, inventories, prepaid expenses, and other marketable securities. 

• Fixed Assets

Long-term resources like machinery, equipment, and buildings are fixed assets. They include office buildings, technology, equipment, and other things. 

It is worth noting that these assets will depreciate over time. Therefore, asset depreciation is accounted for as an expense.

• Financial Asset

Financial assets are liquid assets whose value is linked to and influenced by contractual agreements on either future cash flows or equity ownership of another entity.

The most usual financial assets are common and preferred stocks, corporate and government bonds, and other hybrid securities.

The value of financial assets is difficult to determine as it often depends on the type of security the assets are associated with and their expected future cash flows.

• Intangible Assets

Intangible assets are non-physical assets. For example, patents, goodwill, copyrights, and trademarks fall under intangible assets.

Businesses can either produce intangible assets independently or obtain them after acquiring another company.

Like fixed assets,  intangible assets must be either amortized or periodically assessed for impairment.

Asset Purchase

When a buyer purchases a company's assets, it is referred to as an asset purchase, in which the seller continues to be the entity's legal owner.

Equipment, licenses, client lists, and inventory are just a few examples of the specific business assets that the acquirer purchases.

In an asset transaction, a buyer can pick and choose the assets and liabilities of a company they want to purchase. They are not required to assume any liabilities that they believe would harm their firm after the acquisition.

Asset purchases do not include buying the cash of the target company. Moreover, the seller is still responsible for paying off any outstanding debts after the asset transaction.

Because they offer more flexibility, the purchaser prefers asset purchases over stock purchases.

Asset Purchase Advantages

Some benefits of asset purchase transactions are described below:

• Asset purchases can potentially provide a major tax advantage for the acquirer. They allow the acquirer to raise the amount of its capital investment in assets above the current tax assessment and gain tax deductions for depreciation and/or amortization.

In an asset deal, goodwill, the amount paid to acquire a company that is greater than the fair market value of the company, can be amortized over 15 years using the straight-line method to reduce taxes. 

When an acquirer purchases a target firm in a stock transaction, goodwill cannot be subtracted until the acquirer sells the shares.

• In addition, as mentioned earlier, what assets and liabilities to acquire in an asset transaction is up to the buyer. This lessens the chance for the buyer to be subject to unforeseen or unreported liabilities from the seller. 

It also cuts down on the time and money spent on due diligence before purchase. 

For instance, if the buyer discovers that the target has numerous receivables that might not be collected, they might simply decide not to buy the receivables of the target company.

• Furthermore, it is possible to effectively compel minority shareholders who do not want to sell shares to give up their shares in an asset sale. Minority shareholders are typically not taken into account in an asset deal.
• Lastly, buyers can decide which staff to keep or let go of without hurting the business.

Asset Purchase Disadvantages

Compared to stocks purchases, assets purchases have the following drawbacks:

• The new owners may need to renegotiate and/or update existing contracts, particularly with clients and suppliers. In addition, there may be a need to revise employment contracts with critical employees.
• In addition, the seller normally has more tax obligations than the buyer. Hence, the seller is likely to deliberately lift the purchase price.
• What’s more, in an asset deal, third-party approval is needed when transferring contracts.

For instance, certain intellectual property transfers may need government permission, and government licenses might not be transferable. 

• Certain assets might need to be re-titled into the new entity's name. This process can be time-consuming and costly as the buyer must pay the re-titling fee and a sales tax.
• Aside from paying the outstanding debts and terminating leases, the seller must also liquidate the assets the acquirer does not purchase.

Stock

Simply put, a stock, also known as equity, is a financial instrument representing a portion of firm ownership. Stockholders are entitled to a portion of the company's assets and earnings based on the number of shares they own. Stock volume is measured in terms of shares.

To raise money without taking on more debt, businesses can issue stocks. As new shares are issued, the existing shareholder’s ownership would be diminished.

In the stock market, shares of publicly traded corporations are bought and sold. As a result, only a small number of investors possess shares in private enterprises.

While rising share prices indicate increased profitability and growth, a declining share price can signal that the business is having trouble.

Most individual investors' portfolios are mostly stocks traded on stock exchanges like the New York Stock Exchange and Nasdaq. In addition, government regulations are intended to safeguard investors from fraud.

Stocks have historically outperformed the majority of other assets over the long run. 

Types of Stocks?

Generally speaking, there are two main types of stock: common and preferred. 

• Common stock：

Common stock is a type of security that represents ownership in a firm. Common stockholders can claim a company's profits and exert control over it by casting their votes in board elections and on key business decisions.

Common stock owners profit from a rise in the value of their investments. As a result, returns from this type of security are often higher than preferred stocks or bonds. However, higher gains are accompanied by greater risks when investing in these assets.

Common stockholders do not have any claim to the company's assets in the case of liquidation until all bondholders, preferred stockholders, and other debt holders have been paid in full.

Common stock is recorded in the stockholders' equity section on the balance sheet.

• Preferred stock：

While preferred stock also refers to ownership in a firm, it differs from common stock in that preferred shareholders normally have no or fewer voting rights in corporate governance than common shareholders.

However, preferred shareholders have a greater claim on assets in the event of liquidation or bankruptcy than common shareholders but less than bond shareholders.

Preferred stock is often structured to include the possibility of conversion into common stock at a pre-set exchange rate, enabling investors to benefit from a set dividend but participate in the upside if a company’s common equity value increases.

Preferred stocks share similarities with both bonds and common stock. They can be seen as security between bonds and common stocks. Certain investors are attracted to preferred stocks specifically for this reason.

What is a Stock Purchase？

In a stock purchase, the acquirer obtains the target company's assets and known liabilities by purchasing the target company’s shares, thereby obtaining ownership of the target company. The target company and its operations remain intact in a stock deal.

Compared to an asset deal, a stock transaction is more straightforward. In addition, unlike an asset deal, stock deals do not entail numerous separate transactions of each asset.

This is because the title of each asset lies within the seller’s legal entity, whose ownership is fully obtained by the buyer in a stock purchase. Most contracts, including leases and licenses, held by the target business are automatically transferred to the new owner.

In mergers & acquisitions, stock deals are more commonly used than asset deals, as it is easier to value a firm as a whole as opposed to only valuing its assets.

Stock Purchase Advantages

A stock purchase has the following advantages:

• Stock transactions enable the buyer to purchase all of the firm's assets, with no additional work like asset re-titling or contract assignment needed. As a result, acquirers are relieved of the burden of costly asset re-titling and revaluations.
• Buyers can also avoid transfer taxes.
• Buyers do not have to worry about securing third-party approval, as they can assume licenses and permits directly from the seller.
• Stock purchases are more commonly used because they are simpler than asset purchases. Hedge funds normally conduct M&A deals through stock purchases.
• Stock purchases allow the buyer to access the target company's goodwill and credit history. This means that the buyer can enjoy favorable finance terms and brand recognition of the target, which can take a company a lifetime to develop.

Stock Purchase Disadvantages

The following are drawbacks of stock deals:

• The buyer cannot cherry-pick assets and liabilities. They also cannot raise the amount of their capital investment in assets above the current tax value to gain tax deductions. 
• In addition, it is not tax-deductible to write off goodwill that takes the form of a share price premium.
• The buyer assumes ownership of all assets and liabilities of the target company, including the undesirable ones. To get rid of unwanted liabilities, the buyer has to create separate agreements for the target company to take the liabilities back. 
• A stock deal can become complicated, particularly if the target firm has many stockholders.

A sizable number of stockholders in the target company can make coordination challenging because some of the stockholders can be impossible to contact.

The buyer’s efforts to acquire all of the outstanding equity of the target company may be hampered by absent shareholders or those against the transaction.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Joint Venture (JV)
• Letter of Intent (LOI)
• Memorandum of Understanding (MoU)
• Merger
• Mergers & Acquisitions (M&A)