If you are interested in buying or selling a business in Atlanta, you’ll have a choice to structure it as a purchase of assets or a purchase of stock. Both Atlanta business buyers and sellers have reasons for preferring one over the other. An asset purchase values each asset w/ an assumption of specific, negotiated liabilities. On the other hand, a stock acquisition is a transfer of total ownership where the entity continues to own the same assets and liabilities.
Under this scenario, the seller remains as the legal owner of the entity and the buyer is purchasing individual assets of the company (e.g., equipment, licenses, customer lists, goodwill, and inventory). The seller retains its long-term debt obligations. However, the net working capital of the firm is typically included in the purchase agreement. Net working capital consists of assets and liabilities that can be converted to cash in 1 year or less (i.e., current assets and liabilities). Examples of current assets and liabilities are accounts receivable, inventory, and accounts payable.
Asset Purchase Advantages
Asset transactions provide buyers the following advantages:
- Ability to “step up” the cost basis of assets on balance sheet by allocating the negotiated purchase price to those assets. This increases their current tax values and provides additional tax deductions for depreciation and/or amortization in the form of Goodwill.
- Goodwill is the purchase price less the book value of its tangible assets, can be amortized on a straight-line basis over 15 years for tax purposes. In other words, goodwill amortization decreases taxable income.
- Limited exposure, if any, to liabilities that are often either not known entirely or not stated properly by the seller.
- Omitting certain assets. For example, over 90 days accounts receivable can simply be left out of the transaction because they are likely not collectible.
- Much simpler/shorter and less costly due diligence. Transaction is simpler at least in terms of dealing with liabilities.
- Minority shareholders can be forced to accept the terms of an asset sale.
Asset Purchase Disadvantages
- Having to negotiate new customer and supplier contracts, re title assets, re do employment agreements, etc. increases costs and effort of the deal
- Higher transaction and tax cost because price is higher in asset sale to seller may make negotiations more difficult. Equity value is typically less than enterprise or total asset value.
A stock purchase is simpler conceptually than an asset purchase. The buyer basically buys the stock of the seller with no real adjustment to or negotiating new assets and liability agreements such as leases and permits.
Stock Purchase Advantages
Stock transactions provide buyers the following advantages:
- Buyer doesn’t have to contend with costly re-statements and retitles of individual assets.
- Buyers can typically assume leases, licenses and permits without having to obtain consent of a third party
- Buyers can possibly avoid paying transfer taxes because asset ownership remains the same.
Stock Purchase Disadvantages
- Buyer receives neither the “step-up” tax benefit nor the advantage of “handpicking” assets and liabilities.
- All assets and liabilities transfer at carrying value with transfer tax attached.
- Must contend with risky liabilities
- Falls under scrutiny of securities laws and shareholder views. This can complicate and increase time to close transaction increasing costs
- There is no tax deductible goodwill when it exists in the form of a share price premium.
Both buyer and seller should seek advice of tax professionals and a financial advisor to determine which structure to pursue. Call Brad at 770-380-2406 to discuss your particular situation in more detail about selling or buying a business in Atlanta.