Buying assets or buying shares is a decision you must make when you are looking to invest in a company. Generally, sellers prefer to sell shares and buyers prefer to buy assets. There are several distinctions between the two, along with pros and cons, to consider before making the decision.

An important part of a growing company includes mergers and acquisitions. This can be done by purchasing assets or purchasing shares. Asset transactions are usually done when the transaction just involves portions, or all, of the companies assets. Stock acquisitions involve purchasing all of the company's shares and going directly through the shareholders.

Purchasing Shares

In the case where a seller is transferring all business shares to a buyer, the seller relinquishes rights and liabilities associated with the business and the buyer inherits these same rights. Typically, there is no interruption to the business during this process, and business operations continue as normal.

Once the seller sells all shares, there are no longer any ties to the business and the seller is no longer tied to any liability, current or future. The exception to this would be if the seller agreement had any specific clauses or considerations that would change this arrangement.

Another positive for the seller is a potential tax advantage. In some circumstances, the capital gains exception can be used to shelter up to $750,000 worth of capital gains associated with this transaction.

Conversely, just as the seller relinquishes all current and future liabilities, the buyer inherits these same liabilities in the transaction. This is true even of unknown and unseen issues, including environmental or tax issues, or pending lawsuits. Any major issues known going into the transaction can lower the price the seller is able to command.

Because of the inherent risks in this transaction, it is extremely important for the buyer to do research on the company to understand all associated risks and problems that may be involved. With a full understanding of the risks, the buyer can ensure that the cost of the transaction reflects any liability issues.

Purchasing Assets

In a transaction involving assets, the seller will sell particular assets but keep ownership of the actual shares of the entity. The agreement between the two parties will specifically detail which assets and liabilities are changing hands. Anything not included in the agreement will stay with the original owner.

Asset transactions include more flexibility than share transactions. The sale can involve only specific assets, or it might include all business assets. Asset transactions are also typically viewed as more favorable to the buyer since they know exactly which assets and liabilities they are acquiring. There is less research needed and less possibility of unpleasant surprises.

There are some disadvantages, though, to asset transactions. It can be difficult to negotiate exactly which assets are being purchased as often there are shared assets involved. For instance, if a business sells a particular division, they would sell assets associated with that division. But if there were shared assets involved with other divisions, these would need to be negotiated and accounted for.

Making the Decision

  • Purchasing shares is generally considered to benefit the seller, while purchasing assets is considered a benefit to the buyer.
  • Asset transactions can allow the purchaser to be sheltered from any unforeseen liabilities.
  • In share purchases, the buyer takes on these liabilities, and the transaction is inherently riskier.

One must also consider the tax implications of the decision, as the accounting for asset and share purchases is handled differently. For an asset purchase, the seller is responsible for capital gain or loss on the transaction, while the buyer gets a tax benefit. In a stock purchase, the tax basis of assets cannot be reset, so the current depreciation schedule must continue to be used. For the buyer, this usually means a smaller tax write-off.

One must also consider all the factors involved in the transaction, as there are other moving parts that the agreement could affect. Employees are a large consideration. With an asset transaction, it is not required that union employees be taken on by the purchaser, but could be something included in the terms. In a share sale, however, the company employees remain with the business.

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