One of the most essential considerations in determining whether to acquire a business is whether to purchase the assets or purchase the stock. There are risks and benefits of either type of acquisition.
An asset purchase is generally a purchase of all or a portion of a company’s assets.
These include, but are not limited to the company’s facilities, equipment, product inventory, vehicles, licenses, trade secrets, trade names, accounts payable and receivable, and goodwill. An asset purchase also allows the purchaser to assume specific liabilities. Assumption of only certain liabilities mitigates the risk assumed by the buyer. Moreover, such a sale may be beneficial as the buyer need only purchase that portion of the assets that is advantageous to their business model. Additionally, with an asset purchase, regulatory issues from a securities perspective are minimized versus the host of regulatory concerns in a stock purchase.
A stock purchase generally results in the buyer assuming 100% of the ownership of the business.
This includes all assets and liabilities. In some respects, a stock purchase can streamline some complexities. If it is a stock purchase, the buyer owns the entire company and can determine how best to operate the company in the most profitable way. Also, unlike an asset purchase, the buyer in a stock purchase retains non-assignable contracts without having to get consent of the transfer from the parties to the contracts. However, one disadvantage is that, in contrast to an asset purchase, a stock purchase is heavily regulated. You also have to consider potential shareholder dissent to the purchase.
When deciding to pursue an acquisition, the buyer should keep these considerations in mind, taking into account the advantages and disadvantages of either transaction. Although a buyer may generally desire an asset purchase, there are distinct advantages to a stock purchase as outlined above. However, a stock purchase is more for the risk tolerant buyer who is prepared to take on the full liabilities of the company, both present and future whereas an asset purchase steers the risk averse away from those portions of assets and liabilities that would be disadvantageous to their overall business model.