Should I buy Assets or Stock?
The most fundamental question for a buyer acquiring a business is whether to buy assets or stock. Most buyer-side accountants and many lawyers have the same gut response: Always asset. An asset acquisition can limit liabilities and provide tax benefits of asset basis step-up. But the devil is always in the details. Asset sales also carry much inherent operational risk. For most buyers it means setting up all new bank accounts, vendor accounts and re-hiring employees. For insurance brokers, it can mean having to re-apply for appointments which may be based on seniority that is now lost. For contracting firms it may mean obtaining new bonding and licensure. For healthcare providers it may mean applying for a new provider number which often requires a six-month holding period for approval during which time the practice cannot bill or collect. In some states, bulk sales tax also applies to some of the transferred assets.
Sometimes these challenges are easily overcome, such as when the acquisition is purely for the assets, not the going concern business. But other times a stock acquisition with appropriate due diligence may be far more seamless and simple without exposing operational risks during the transition. Risk can be properly managed if the buyer does through due diligence, gets adequate representations and warranties from the seller and demands an adequate holdback or escrow to fund indemnities for breaches by the seller. The same tax benefits as an asset sale can also be achieved in a stock sale by using Section 338(h)(10) elections or similar tax treatments for partnerships and disregarded entities.
Andrew J. Miller, JD, CM&AA® advises buyers and seller of main street and middle market companies in private mergers and acquisitions. He is recognized as a Certified Mergers & Acquisitions Advisor® by the Alliance of Mergers & Acquisitions Advisors, an organization focused on the private middle market. He can be reached at (717) 845-1524, or firstname.lastname@example.org.