The advantages to the buyer of purchasing assets, as opposed to buying stock, can be considerable.
First, with an asset purchase transaction, as opposed to a stock sale, a buyer can go a long way toward eliminating the risk of being saddled with the target’s company’s unwanted and unknown liabilities.
Second, if the target company does not sell all, or substantially all, of its assets, the transaction will likely not require shareholder approval or give rise to the dissenters’ rights under the Corporations Code. This will substantially simplify the process by which the transaction must be approved, allow it to close quicker, and reduce the risk of additional payments to the target’s shareholders to get the deal done.
Third, the buyer may obtain a beneficial step-up in the tax basis of the acquired assets to reflect the purchase price of the assets, as compared to inheriting the historic tax basis of the assets when held by the target, which is normally the result when stock is purchased. The step-up in tax basis can be amortized over the tax depreciable life of each asset, which will result in a substantial tax savings for the buyer.
The disadvantages to the target company of an asset purchase transaction, as opposed to a sale of stock, can also be quite considerable. An asset transaction may require extensive negotiations, and even additional consideration, to persuade the target to agree to an asset purchase transaction rather than a stock sale.
First, the target company may be required to retain significant known and unknown liabilities that it would rather pass off to the buyer.
Second, if the consideration for the sale of assets is distributed to the target company’s shareholders, the asset purchase will result in double taxation on the gains from the sale: first at the target company level and then at the shareholder level.
Third, third party consents to the assignment of critical contracts, leases, permits or licenses can delay or destroy the deal. Moreover, paying off a third party so it will consent to an assignment can add substantial costs to a transaction. There may be other disadvantages to seeking consent, including delaying the closing, disclosing the transaction to outside parties who may be competitors, and providing a consenting party with leverage to place conditions on its consent.
Fourth, if the transaction will result in the target company selling all or substantially all of its assets, the target’s board and shareholders must approve the deal. This will add another layer of review and approval and almost certainly add time and cost to the transaction. Under the best of circumstances the delay could cost both parties money, and under the worst of circumstances it could completely scuttle the transaction.
Asset purchase transactions can be quite complex for both the buyer and the target company. Regardless of whether you’re the buyer or seller, don’t go it alone. At Finkel Law Group we have extensive experience representing buyers and targets in asset purchase transactions all across California.