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Asset Purchase or Equity Purchase?

Posted by Ryan M. Newburn | Feb 26, 2021 | 0 Comments

Asset Purchase or Equity Purchase?

There is no one way to acquire a business. Buying and selling companies, whether large or small, can be complex and burdensome. At Newburn Law, we support clients through every phase of the acquisition process and work with them to structure the purchase in a way that works for their unique business. If you are considering buying a business, contact our experienced M&A attorneys at Newburn Law to discuss your company and learn more about the pros and cons of an asset purchase vs. an equity purchase. Contact us today to set up a consultation.

What Is an Asset Purchase?

When a purchaser decides they want to buy an existing business, there are two main ways to structure the transaction. The first is an asset purchase. Under this type of agreement, the purchaser agrees to buy all of the company's assets, including things like:

  • Real estate
  • Plants
  • Equipment
  • Machinery
  • Stocks
  • Goodwill
  • Existing contracts

An asset purchase agreement specifies out all of the assets and liabilities the purchaser is willing to acquire and assume with the seller, by default, retaining everything else. Title to all of the specified assets are transferred to the buyer's name, while the seller remains the legal owner of the company.

What Is an Equity Purchase?

A stock or equity purchase, on the other hand, occurs when the buyer purchases stock or other equity interests and takes over as the legal owner of the business entity. This type of transaction also entails a beneficial transfer of assets and liabilities from the seller to the buyer, but instead of taking the assets and liabilities directly, the buyer ownership of the entire company. Unlike in an asset purchase, the assets remain titled in the company's name and are not to be re-titled to the buyer.

What Are the Pros of an Asset Purchase?

There are several benefits to an asset purchase including the following:

Control Over Assets (and Liabilities) Acquired

One of the most important benefits of an asset purchase is that the buyer gets to decide exactly what they are buying. Unlike a stock purchase, the asset purchase agreement lays out which assets the buyer is taking over and which are being left behind. Further, the agreement can also detail which liabilities the buyer is taking on, if any. Liabilities that are not specifically assumed by the buyer are left with the selling company. This is an advantage over stock purchases because a stock purchase means taking ownership of the entire company, including unknown or contingent liabilities.

Do Not Need to Negotiate with Minority Shareholders

Minority shareholders can oppose selling the company. In a stock sale, you need to buy the minority shareholders' ownership, or at least enough to control the company, in the process of the transaction, which can be very difficult to get everyone to agree to. An asset purchase does not require a unanimous agreement among shareholders.

Does Not Involve Securities Regulations

An asset purchase is not a sale of securities. Exchanging securities can come with a significant regulatory burden, so when a buyer decides on an asset purchase rather than a stock purchase, they avoid some of the burdensome federal and state securities laws and regulations.

Tax Benefits for Buyers

Buyers usually prefer asset purchases vs. equity purchases for tax purposes. Asset purchases provide the buyer with a “step-up” cost basis in the assets being purchased. This means that when the purchaser acquires the asset, the new basis in the asset is the price paid in the sale. Contrast this with a stock sale, where the buyer takes on the existing basis of the assets. The long-term tax consequence of a “step-up” basis is that when that asset is eventually sold in the future, the gain on the sale will be smaller, resulting in a lower tax bill.

What Are the Pros of an Equity Purchase?

There are several benefits of an equity purchase as well, including the following:

Voting Rights and Ownership

An equity purchase allows the buyer to take control over the business by acquiring voting stock in the company. Unlike an asset purchase, where the buyer simply buys the assets of the company, an equity purchaser actually buys the company itself, which can be beneficial if the company is performing well or has additional value as a going concern.

Easier to Assign

An equity purchase does not require the company to title all of the assets in the purchaser's name. Though this seems like a mere technical detail, re-titling assets can be an expensive and burdensome legal process. Instead, the buyer purchases the company's stock, and legal ownership of the entire company shifts to the buyer, but the assets remain titled in the company's name. This can be significant if the company being acquired has particularly complicated assets, such as patents, trademarks, permits or government contracts.

Straightforward If Minimal Shareholders

Some private corporations do not have many shareholders. If you are considering purchasing a company with a small group of owners, the stock sale may be more straightforward than entering into a complex asset purchase where individual assets and liabilities need to be listed out.

Lower Capital Gains Taxes for Sellers

There are many tax implications that may occur with respect to purchasing a business, like those described by the Secretary of State of Colorado, Although buyers may lose the “step-up basis” benefits of an asset purchase, sellers may prefer to sell their business as a stock sale because they can be taxed at the capital gains rate for the sale of stock

Talk to an Experienced Corporate Attorney

Purchasing a company is a major decision, and there are multiple ways to structure the purchase. There are significant differences between the methods, so you should be sure to speak with an attorney about the pros and cons of an asset purchase vs. an equity purchase. If you are considering buying a business, the business lawyers at Newburn Law can help you decide which type of purchase is best for you. Contact us to set up a consultation and tell us more about your objectives.

About the Author

Ryan M. Newburn

Ryan Newburn is a business and legal expert trusted by Executive Teams and Boards of Directors to apply sound business principals to solve legal and financial problems. Ryan's practice focuses on mergers and acquisitions, financings, corporate formations and corporate governance in a broad range of industries including energy, distribution services, healthcare, medical devices, and technology. Leveraging his formal business training and years of practical experience, including as an executive at public and private companies, Ryan has advised hundreds of companies in dozens of industries of unique legal and financial issues.

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