When considering an M&A transaction, one of the most important decisions to make at the outset is whether to structure the deal as an asset purchase or a share purchase. Each approach has its advantages and disadvantages, and choosing the right one depends on a variety of factors. This article will summarize the relevant issues to consider in making this decision.
An asset purchase is a transaction in which the buyer acquires specific assets and liabilities of the business, rather than the legal entity that owns them. In an asset purchase, the buyer and the seller must negotiate and agree on the specific assets and liabilities that will be included in the transaction. Once the transaction is completed, the buyer owns the assets and assumes the liabilities that were agreed upon.
Advantages of an Asset Purchase
1. Reduced Liability: An asset purchase allows the buyer to acquire only the assets it wants, and avoid assuming any unknown or contingent liabilities of the seller. This can be particularly important in cases where the seller has significant liabilities or potential litigation.
2. Tax Benefits: An asset purchase can provide significant tax benefits to the buyer, as it allows the buyer to allocate the purchase price to specific assets and depreciate those assets over time for tax purposes. This can result in significant tax savings for the buyer.
Disadvantages of an Asset Purchase
1. Higher Transaction Costs: An asset purchase can be more complicated and time-consuming than a share purchase, as the buyer must negotiate the purchase of individual assets and liabilities.
2. Third-Party Consents: In some cases, third-party consents may be required for the transfer of certain assets, which can add complexity and time to the transaction.
3. Intangible Assets: In an asset purchase, intangible assets such as trademarks and goodwill must be separately valued and acquired, which can be challenging.
A share purchase is a transaction in which the buyer acquires the ownership of the legal entity (e.g., corporation or LLC) that owns the assets and liabilities of the business. The buyer acquires all of the shares of the legal entity from the seller, which gives the buyer control over the entire business.
Advantages of a Share Purchase
1. Simplicity: A share purchase is generally a simpler and faster transaction than an asset purchase, as the buyer acquires the entire business in one transaction by purchasing one thing – shares.
2. Continuity: A share purchase allows for continuity in the business, as the legal entity that owns the business remains intact. This can be important for maintaining existing customer and supplier relationships, or in cases where the licenses or registrations required for the conduct of the business may not be easily transferred to a different entity.
3. No Third-Party Consents: In a share purchase, subject to some exceptions, third-party consents are generally not required, because the legal entity that owns the assets and liabilities of the business remains the same.
Disadvantages of a Share Purchase
1. Potential Liabilities: In a share purchase, the buyer assumes all of the liabilities of the business, including any unknown or contingent liabilities.
2. Limited Control: In a share purchase, the buyer may be limited in its ability to cherry-pick the assets it wants to acquire, as it acquires the entire business.
3. No Tax Benefits: A share purchase generally does not provide tax benefits to the buyer, as the purchase price is allocated to the shares of the legal entity rather than specific assets.
Choosing between an asset purchase and a share purchase is an important decision in an M&A transaction. The choice will depend on a variety of factors, including the specific assets and liabilities involved in the transaction, the tax implications for the buyer, and the transaction costs and complexities. It is important to work with experienced legal and financial advisors to evaluate the options and make an informed decision that is in the best interests of both the buyer and the seller.
The team of attorneys at Jun Avila has a depth of experience navigating complex issues that arise in M&A deals and successfully guided its clients to mutually beneficial transactions. Contact Jun Avila to find out how best to sell your business or buy a business.