Asset Purchase vs Stock Purchase

Asset Purchase vs Stock Purchase

Two business professionals shaking hands

Business mergers and acquisitions are important aspects of commercial management and can be handled in different ways, depending on the costs and tax benefits that are most favorable to the seller and the buyer in each case. This guide to asset purchase vs stock purchase will briefly explain the two primary kinds of business acquisition and accounting examples of asset purchase vs stock purchase.

Asset Purchase vs Stock Purchase: The Basics

When buying a sole proprietorship, partnership, or limited liability company (LLC), there is only one way to go about handling the transaction: by purchasing the individual assets of the company. However, when acquiring an existing corporation, the business can be transferred in two ways: either by purchasing the individual assets such as facilities, inventory, equipment, and vehicles (an asset purchase) or by buying the owner’s share of stock (a stock purchase).

In legal terms, the seller (“the Target”) can sell the buyer (“the Acquirer”) the sum of their individual assets and agreed-on liabilities or simply transfer the owner’s stocks of the business entity without separating responsibility for the assets and liabilities that are part of that entity. Let’s take a look at each option, along with some asset purchase vs stock purchase accounting examples.

Asset Purchase vs Stock Purchase: Asset Purchase Advantages

Ability to Select Assets and Liabilities

An asset purchase, while the more complicated of the two acquisition models, is also the only way to pick and choose which assets and liabilities you wish to acquire. For example, you may be happy to purchase the company’s facilities and equipment, but don’t want to take on the liability of their debts or unresolved accounts payable. In a stock purchase, you acquire all of the company’s assets and liabilities — including liabilities that might be unknown or uncertain.

Tax Advantages

Another advantage of an asset purchase is that the buyer can receive a stepped-up tax basis if the purchase price exceeds the aggregate tax basis of the assets being purchased. For example, if the Acquirer purchases the Target’s real estate for its market value of $1,000,000, they won’t have to pay capital gains tax on the $800,000 appreciation in value since the assets were originally purchased for $200,000.

In Texas in 2020, the long-term capital gains tax rate for gains of $469,051 and above is set at 20%, meaning that you could be saving yourself $160,000 in taxes.

Minority Shareholders Won’t Delay the Process

In a large company, a high number of individual shareholders might make it difficult to consider the simpler stock purchase option, as laws governing securities come into play and some (or even many) minority shareholders might not want to sell their stocks. In an asset purchase (vs stock purchase), minority shareholders aren’t required to sell their stocks — preventing delays in the acquisition process.

Asset Purchase vs Stock Purchase: Stock Purchase Advantages

It’s a Simpler Process

Comparing asset purchase vs stock purchase, a stock purchase is by far the simplest and most streamlined way to go about acquiring another company — all you need to do is buy the stocks and the process is pretty much automatic from there. Not only do you bypass the step of valuing each of the Target’s assets, but you also bypass any need to retitle these assets one by one. This means you’ll need to consider far less asset purchase vs stock purchase accounting examples as part of the reallocation of assets.

Automatic Transfer of Contracts

In a stock purchase, the selling company’s nonassignable permits, licenses, and contracts will normally pass over to the buyer without the other parties having to give their consent. However, you will need the shareholder’s permission for the purchase of the company’s stocks to take place.

Skip Most of the Taxes

In a stock purchase, the assets are not officially being retitled and therefore the transfer is generally not subjected to sale taxes or transfer taxes. Ideally, this option would qualify the seller and the buyer for a tax-free reorganization of assets.

Asset Purchase vs Stock Purchase: Other Factors to Consider

We’ve looked at the advantages of stock purchases vs. asset purchases. Now let’s look at the two primary disadvantages of a stock purchase (as we’ve explained, the main disadvantage of an asset purchase is its extreme complexity).

You Have to Take the Bad with the Good

In an asset purchase, you can choose not to transfer any aspect of the company that might result in a loss or liability to you. In a stock purchase, you have to accept the liabilities together with the assets.

Lower Asset Values

In an asset purchase, you pay the fair market value for each individual asset and your tax basis is stepped up to reflect this. In a stock purchase, all of the assets are transferred at “carrying value,” which is calculated at the original cost, minus depreciation per year.

For example: If you are buying a large agricultural enterprise with five tractors originally purchased at $50,000 each and calculated to have a five-year lifespan, the carrying value for each tractor would be $50,000 – $10,000 for each year elapsed since the purchase. In this model, tractors more than five years old would have a carrying value of $0.

Compare this with the fair value or market value for each tractor, which could be significantly higher if those tractors have been meticulously maintained and the market price for that model has risen. It could also be lower if the market is experiencing a significant downturn. This is just one other accounting example that could influence the asset purchase vs stock purchase decision.

Receive Fiduciary Advice from ML&R Wealth Management LLC

As you have seen from our asset purchase vs stock purchase accounting examples, the decision between asset purchase vs stock purchase can have complex financial ramifications. The best way to decide which option will be better for your long-term financial future is to consult with a fiduciary wealth management advisor. ML&R Wealth Management LLC has more than 20 years of experience serving small and large businesses in Austin, Texas.

Contact our friendly team of advisors to schedule your free initial consultation.

About Author

ML&R Wealth Management

As Chief Compliance Officer, Sarah Wasaff works to keep our department in agreement with SEC regulations. Sarah joined ML&R Wealth Management LLC in 2015. In addition to her role as CCO, Sarah is the Director of Operations and creates processes to make our team function efficiently. SEC compliance is her specialty.

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