Ways to buy a business
Asset deals vs Stock deals - in plain English
TL;DR: A share deal is when you buy the entire company. An asset deal is when you pick which parts of the company you are buying.
Deciding whether to structure a business sale as an asset sale or a stock sale can be complicated because the parties involved benefit from opposing structures
Generally, sellers prefer stock deals, and buyers prefer asset deals
But there are advantages and disadvantages to each structure, depending on why you are doing the deal in the first place
So with that being said, before we jump in, let’s cover some of the reasons why you might want to buy a company …
Reasons for Buying Another Company:
Gain economies of scale: Jet Blue buys Spirit Airlines and can now use the same airport crews and back office staff. They have more leverage in their business model and can realize “efficiencies” (fewer people, fewer terminals, better fuel rates)
Reduce competition: Draft Kings and Fan Duel attempted a merger which would have created one massive betting platform, and basically the only live betting “game in town” in many states. History has shown that building a monopoly is indeed a great business strategy (see: Standard Oil, Microsoft, AT&T, and Meta)
Move into an adjacent market: Broadcom, a chip producer, bought VMware, a cloud computing and virtualization company. Now they can upsell and cross sell VMware’s portfolio, technology they previously couldn’t offer. As a serial acquirer (CA Technologies, Symantec) they’ve bought their company a second (fourth?) act.
Move into a new geographic market: Uber bought Careem in Dubai to move into a new country market. It’s easier for them to buy up a ride sharing hub that’s already fought local regulatory battles and hired drivers rather than start from scratch.
Stock Deal:
Overview: This is the most common and straightforward way to acquire a company. When the transaction is structured as a stock acquisition, by its very nature, the acquisition results in a transfer of the ownership of the business entity itself, and the entity continues to own the same assets and have the same liabilities. It’s generally more tax friendly for sellers (read: the one’s getting a pay day).
(Potential) Advantages for Buyer:
Assume Key Contracts and Patents: For Buyers it’s easier to assume patents and vendor contracts, since the corporation maintains ownership. This is a big benefit if the contracts would be difficult to re-assign or if the company is dependent on a few large vendors or customers who might churn.
Disadvantages for Buyer:
For the Buyer, in addition to all of the desired assets and liabilities of the company they're purchasing, they also assume ownership of all the unwanted assets and liabilities, too. You get the good with the bad.
The Buyer might run into challenges with minority stockholders who may not want to sell. Holdouts can cause delays, and in the worst case, block the deal entirely.
Advantages for Seller:
Avoid Double Taxation: Sellers often favor stock sales because all the proceeds are taxed at a lower capital gains rate, especially if they’re selling a C-corp. More on this later.
Avoid Future Liabilities: Sellers often favor stock sales because they’re less responsible for future liabilities, such as product liability claims, contract claims, employee lawsuits, pensions, and benefit plans. Walk away with clean hands.
(Potential) Disadvantages for Seller:
New Boss: Most stock acquisitions have retention clauses for key employees. The Seller CEO and management team may now have to work for an extended period of time (usually at least ~18 months) for the Buyer.
Disclaimer: Opinions are my own. Not financial advice. I also know next to nothing about taxes. Do your own research.
Asset Deal:
Overview: This structure is less common and more complicated compared stock deals. In making an asset sale, the seller remains the legal owner of the entity. At the same time, the buyer purchases individual assets of the company, plucking equipment, licenses, goodwill, customer lists, or inventory.
Buyer Advantages:
Step Up: For the buyer it can be more tax friendly in the long run. There’s this complicated tax thing called “step up” where the buyer can increase the value of the assets they bought over time to take more depreciation against them. I am not a tax expert, but I understand this is “good”.
Pick and Choose: The buyer knows exactly what they’re getting - they can can dictate what, if any, liabilities they will assume in the transaction. This limits exposure to unknown bad stuff that could be lurking on the balance sheet or in courts.
Avoid Hiring and Firing: If you are just plucking assets, you don’t have to take on or hire people at the seller’s company if you don’t want to. This is a big deal, because in many stock deals the acquired employees are “rationalized” later on. For example - you don’t need two CFO’s at one company.
(Potential) Buyer Disadvantages:
Renegotiate Key Contracts: The buyer might need to renegotiate key supplier or customer contracts since they will not be doing business in the seller’s name anymore. Suppliers or customers might need to sign on with the “new” company.
Overpay to Cover Tax Burden: The tax cost to the Seller is usually higher in an asset deal, so the Buyer might have to “overpay” if they really want the Seller to take the deal. Asset sales generate higher taxes for Sellers because intangible assets, such as goodwill, are taxed at capital gains rates, but “hard” assets can be subject to higher ordinary income tax rates. In general, asset deals have fewer “intangible assets” and more “hard assets.”
(Potential) Seller Advantages:
Staying Alive: Sometimes the seller wants to spin off a piece of the business but doesn’t want to cease doing business entirely. They may want to continue operating and concentrate on a smaller piece of the market. In addition they may have multiple valuable patents they don’t want to sell.
Seller Disadvantages:
Double Tax for Sellers: If the entity they’re selling is a C corporation, it will be taxed when it sells the assets and then the owner will be taxed when transferring those proceeds out of the corporation. Ouch!
Plan for Remaining Assets: The seller has to come up with a strategy for what to do with any assets that aren’t sold - will they be liquidated? Will they become a standalone business? This can be a mess to untangle afterwards.
Smart Stuff I Read at 2AM:
Stock vs Asset Deals - Corporate Finance Institute
Tax Impact for Sellers - Mariner Capital Advisors
Advantages and Disadvantages of Stock Deals - MelCap Advisors
Quote I’ve Been Pondering:
“A skill isn’t real until it holds up under pressure”
-Drew Hanlen, NBA Skills Trainer