In a stock deal, the buyer purchases shares directly from the shareholder. Stock acquisitions are the most common form of acquiring a private business. They are mostly used by small corporations selling stock, but not usually when the owner is the sole stockholder, or when the buyer is acquiring 100% of the stock.
What do you need to know about a stock deal?
Similarly, they must specify which liabilities are assumed by the buyer and which are left behind. In a stock deal, all assets owned by the company and all liabilities owed by the company move along with the sale unless specifically called out in the purchase agreement.
What is an all stock deal called?
All-Stock Deal. The terms “all-stock deal” and “all-paper deal” are often used in reference to mergers and acquisitions. In this type of acquisition, shareholders of the target company receive in the acquiring company as payment, rather than cash.
What is the difference between an asset deal and stock deal?
Unfortunately, an asset deal and a stock deal may be treated very differently for tax purposes, and (depending on a variety of factors) an asset deal could result in significantly higher taxes, and therefore significantly less “walk away money” for the seller, compared to a stock deal.
Who is the “seller” in a stock deal?
Even still, when all is said and done and sellers are fully educated, they will almost always seek a stock deal as opposed to an asset deal. How does this decision affect the definition of the “seller”? In a stock deal, the owner of the business is the seller. He or she is selling her equity in the business.
How does a stock deal work?
A stock-for-stock merger occurs when shares of one company are traded for another during an acquisition. When, and if, the transaction is approved, shareholders can trade the shares of the target company for shares in the acquiring firm's company.
What does a stock sale mean?
Stock sales Through a stock sale, the buyer purchases the selling shareholders' stock directly thereby obtaining ownership in the seller's legal entity. The actual assets and liabilities acquired in a stock sale tend to be similar to that of an assets sale.
What is the difference between a stock deal and an asset deal?
An asset sale occurs when a business sells all or a portion of its assets. The seller, or target company, in this type of deal, is still legally the owner of the company, but no longer owns the assets sold. In a stock sale, the buyer acquires equity from the target company's shareholders.
How do cash and stock deals work?
The main distinction between cash and stock transactions is this: In cash transactions, acquiring shareholders take on the entire risk that the expected synergy value embedded in the acquisition premium will not materialize. In stock transactions, that risk is shared with selling shareholders.
Why do sellers prefer stock sales?
Sellers generally prefer stock sales due to the lower favorable capital gain treatment. From a non-tax perspective, sellers also prefer stock sales as this type of transaction generally affords them liability protection by relieving them of both known and unknown liabilities.
Who keeps the cash in a stock sale?
Smaller deals are typically structured so that the seller keeps cash and AR. Larger deals, especially ones that use EBITDA for the valuation metric (typically $500K in earnings and above), are typically sold with “gas in the car”.
Are stock deals taxable?
Broadly speaking, acquisitions can be structured as either asset or stock sales. In a taxable stock acquisition, the buyer acquires stock from the target company's shareholders, who are taxed on the difference between the purchase price and their outside basis in the target's stock.
What happens to employees in a stock sale?
In a stock sale, the buyer is essentially taking over the seller's entire business, including the employees who are still at their same desk, doing the same work. In other words, the buyer cannot treat these 'acquired' employees as new hires when it comes to the 401(k) plan.
Should I do a stock sale or asset sale?
Among the many considerations when negotiating the structure of the sale are your tax implications and potential liabilities. Stock and asset sales affect these issues in different ways. For this reason, we find that buyers typically prefer asset sales, while sellers generally opt for stock sales.
Can you sell a stock if there are no buyers?
When there are no buyers, you can't sell your shares—you'll be stuck with them until there is some buying interest from other investors. A buyer could pop in a few seconds, or it could take minutes, days, or even weeks in the case of very thinly traded stocks.
What happens if you own stock in a company that gets bought out?
If the buyout is an all-cash deal, shares of your stock will disappear from your portfolio at some point following the deal's official closing date and be replaced by the cash value of the shares specified in the buyout. If it is an all-stock deal, the shares will be replaced by shares of the company doing the buying.
Should you buy stock before a merger?
Pre-Acquisition Volatility Stock prices of potential target companies tend to rise well before a merger or acquisition has officially been announced. Even a whispered rumor of a merger can trigger volatility that can be profitable for investors, who often buy stocks based on the expectation of a takeover.
Advantages of An Asset Purchase
Here are several advantages of an asset purchase vs stock purchase: 1. A major tax advantage is that the buyer can “step up” the basis of many asse...
Disadvantages of An Asset Purchase
Here are several disadvantages of an asset purchase vs stock purchase: 1. Contracts – especially with customers and suppliers – may need to be rene...
Advantages of A Stock Purchase
Here are several advantages of a stock purchase vs asset purchase: 1. The acquirer doesn’t have to bother with costly valuations and retitles. 2. I...
Disadvantages of A Stock Purchase
Here are several disadvantages of a stock purchase vs asset purchase: 1. The main disadvantage is that an acquirer receives neither the “step-up” t...
What is an all stock deal?
The terms all-stock deal and all-paper deal are often used in reference to mergers and acquisitions. In this type of acquisition, shareholders of the target company receive shares in the acquiring company as payment, rather than cash.
Why are all stock deals favorable?
All-stock deals can be favorable for the shareholders of target companies if the merger is successful and results in an increase in the value of the acquiring company’s stock. However, because the value of shares can also decrease, all-stock deals involve more risk for target company shareholders than all-cash deals.
When is a universal stock deal used?
All-stock deals may be used when shareholders of a target company prefer to obtain ownership in the acquiring company rather than receive ...
How does a stock sale work?
In a stock sale of a C or S corporation, the buyer would simply purchase the outstanding shares directly from the shareholder and take over the entire business, including all assets and liabilities. For the seller, this is a favorable transaction from a tax perspective, as share sales are taxed as capital gains. The tax benefit to the seller is amplified if the target entity is a C-Corporation that would be subject to double taxation. In general, sellers are relieved of most ongoing liabilities after a stock sale, although some of this can be shifted back to the seller via the purchase agreement.
What is an asset sale?
Asset Sale: In an asset sale, the buyer has the option to purchase all of the assets and liabilities or specific assets (and assume certain liabilities) item-by-item of a target corporation.
Why do buyers prefer asset sales?
Buyers typically prefer asset sales because they are able to “step” up the basis in acquired assets (particularly equipment and goodwill), which provides a future tax benefit through higher depreciation expenses leading to higher after-tax cash flows to the purchaser. Due to the desire for the higher after-tax cash flows, buyers may pay a higher purchase price. The new tax legislation will increase this point of negotiation with the new 100% bonus deduction on tangible personal property acquired after September 27, 2017.
Is an asset sale good for the buyer?
While an asset sale may be good for the buyer, the seller may have adverse tax consequences. These consequences can range from minimal to catastrophic. The adverse consequences are determined by whether the corporate seller is an S or a C corporation, the asset price allocation, and other facts and circumstances.
Can a buyer and seller structure a stock deal?
There are many ways a buyer and seller can structure a stock deal and the consequences to each can be very different, however, the most common are the following: As noted above, one of the difficulties of an asset deal is that it may be more difficult to transfer certain contracts and leases. If such contracts are integral to ...
Do you have to pay down debt upon closing an asset sale?
In nearly all asset sales, the seller will retain excess cash but must pay down retained debt upon closing the transaction. The seller will also be required to provide a sufficient level of working capital to operate the business, which tends to be a heavily negotiated item.
Is a stock sale motivated by a seller?
In most cases, the seller is motivated to structure the deal as a stock sale. However, if there are contracts or other assets that the corporation cannot easily transfer/retitle which are necessary, the buyer would be motivated to structure the deal as a stock sale.
What is the buyer of a stock?
With a stock sale, the buyer is assuming ownership of both assets and liabilities – including potential liabilities from past actions of the business. The buyer is merely stepping into the shoes of the previous owner. The buyer of the assets or stock (the “Acquirer”) and the seller of the business ...
What is an asset purchase?
Asset Purchase. In doing an asset sale, the seller remains as the legal owner of the entity, while the buyer purchases individual assets of the company, such as equipment, licenses, goodwill.
What can the buyer dictate?
The buyer can dictate what, if any, liabilities it is going to assume in the transaction. This limits the buyer’s exposure to liabilities that are large, unknown, or not stated by the seller. The buyer can also dictate which assets it is not going to purchase.
How long does goodwill amortize?
With an asset transaction, goodwill, which is the amount paid for a company over and above the value of its tangible assets, can be amortized on a straight-line basis over 15 years for tax purposes. In a stock deal, with the acquirer buying shares of the target, goodwill cannot be deducted until the stock is later sold by the buyer.
What are the advantages of buying assets?
Here are several advantages of an asset purchase transaction: A major tax advantage is that the buyer can “step up” the basis of many assets over their current tax values and obtain tax deductions for depreciation and/or amortization. With an asset transaction, goodwill, which is the amount paid for a company over and above the value ...
What is hedge fund strategy?
Hedge funds. Hedge Fund Strategies A hedge fund is an investment fund created by accredited individuals and institutional investors for the purpose of maximizing returns and.
Is an acquisition an asset transaction?
Acquisitions can be structured either as an asset transaction or as a stock transaction. Where an asset transaction. Asset Deal An asset deal occurs when a buyer is interested in purchasing the operating assets of a business instead of stock shares. It is a type of M&A transaction. In terms of legalese, an asset deal is any transfer ...
Why do stock deals move faster than asset deals?
Stock deals tend to move much more quickly than asset deals for a number of reasons. Buyers can rely on the protection of securities laws so diligence tends to be less involved. Fewer third party consents are required. There are fewer tax issues to debate. Author.
What is an asset deal?
In an asset deal, the parties must mutually agree on a purchase price allocation for tax purposes.
What are the obligations of the buyer and seller in an asset deal?
In an asset deal, the buyer and seller must agree which specific assets are being acquired and which are not being acquired. Similarly, they must specify which liabilities are assumed by the buyer and which are left behind.
Do securities laws apply to stock sales?
Yes, federal and state securities laws apply to a stock sale but do not typically apply to an asset sale. This benefits the buyer because of Rule 10b-5 issued by the Securities Exchange Commission (SEC) pursuant to the Securities Exchange Act of 1934.
Do tax issues pit buyers against sellers?
This is but one of many tax issues that , almost always , tends to pit buyer against seller. Generally speaking though, for most circumstances, the tax issues in a stock deal result in significant reduction in the degree to which buyer and seller are diametrically opposed on tax issues.
Do asset deals require assignments?
Asset deals require assignments; stock deals do not . Obtaining the consent of 4,000 clients and five landlords can often push the buyer and seller to a stock deal regardless of any other consideration.
What does the buyer assume in a stock deal?
It is important to note that in a stock deal the buyer also assumes title of all assets and liabilities. Contrast this with an asset deal, the other method of acquisition, in which the buyer purchases an agreed-upon set of assets and liabilities.
What is a stock acquisition?
In a stock deal, the buyer purchases shares directly from the shareholder. Stock acquisitions are the most common form of acquiring a private business. They are mostly used by small corporations selling stock, but not usually when the owner is the sole stockholder, or when the buyer is acquiring 100% of the stock.
What is an asset purchase agreement?
An asset purchase agreement (APA) might benefit a buyer who wants to exclude liabilities or redundant assets. For example, a target may have uncollectible accounts receivable.
Why is due diligence important in stock acquisitions?
It is important for a buyer to do their due diligence. In a stock acquisition, it’s as if there was no change of business owner for the assets and liabilities. The tax attributes of the assets and the liabilities carry over as well.
What is SPA in stock?
A stock purchase agreement (SPA) is the contract that two parties, the buyers and the company or shareholders, written consent is required by law when shares of the company are being bought or sold for any dollar amount. In a stock deal, the buyer purchases shares directly from the shareholder.
What should sellers pay attention to?
Sellers should particularly pay attention to the purchase and sale of stock, and the representations and warranties section. Definitions – Here is where you include the definitions of terms used in the document, including the types of applicable law that will be used.
What is SPA in stock market?
An SPA is the contract containing the principle agreement between the parties in which the buyers purchase stocks from the shareholders. It is sometimes called a Securities Purchase Agreement, or just a share Purchase Agreement. The key provisions detail the terms of the transaction:
What is an all cash, all stock offer?
An all-cash, all-stock offer is a proposal by one company to purchase all of another company's outstanding shares from its shareholders for cash. An all-cash, all-stock offer is one method by which an acquisition can be completed.
What happens if a company is not publicly traded?
If the acquiring company wasn't a publicly traded company already, it could issue an IPO or initial public offering whereby it would issue shares of stock to investors and receive cash in return. Existing public companies could issue additional shares to raise cash for an acquisition as well.
What does the acquirer do to the shareholders?
The acquirer may sweeten the deal to entice the target company's shareholders by offering a premium over its current stock price. The acquired company's shareholders may earn a capital gain if the combined entity realizes cost savings or is a much-improved company.
What happens when you buy a bond?
Investors who buy the bonds provide cash to the issuing company, and in return, the investor gets paid back the principal –or original–amount at the bond's maturity date as well as interest.
Is a stock for stock transaction taxable?
These stock-for-stock transactions are not taxable. The acquiring firm could also offer a combination of cash and shares.
Is all cash stock taxable?
The downside of an all-cash, all-stock offer for shareholders is that their sale of shares is a taxable event. Even if they sell their shares to the acquirer at a premium, taxes may take a significant chunk of their earnings if the sale price is higher than the price investors paid when they initially purchased their shares.
What is a stock sale?
In a stock sale, a company's shareholder sells their existing stock to a new owner. In this transaction, the buyer obtains all company equity including all assets and liabilities. This means the buyer is at risk from future litigation from liabilities that are not paid and cleared.
How long does goodwill cost for a stock sale?
When an asset sale takes place, the buyer can spread the cost over 15 years, which reduces their tax liability. In a stock sale, the goodwill amount isn't tax deductible until the buyer sells the stock to someone else.
What is the role of the buyer in an asset purchase?
In an asset purchase, the buyer has control over the liabilities that come along with the company's purchase, and as part of the purchase agreement, they can refuse to assume liability for undisclosed or unknown debts . Buyers also have control over the assets included in the sale.
What are the disadvantages of buying an asset?
Some of the disadvantages of an asset purchase include: The buyer may need to renegotiate contracts with customers and vendors. The seller typically pays a higher amount of taxes on the sale, so they may demand a higher price for the purchase. Asset purchases can limit assignable contract rights. Certain assets, such as vehicles, may need titles ...
Why do you need to conduct due diligence when buying a business?
Anyone purchasing a business needs to conduct due diligence to make sure they fully understand the value of what they are buying. However, in an asset sale, the buyer has less risk due to unknown liabilities and asset value. Therefore, they need to do less research ahead of time and can feel more confident in their purchase.
What are the benefits of purchasing assets?
Asset Purchase Benefits. Purchasing a company's assets offers tax advantages for the buyer. If the business has equipment that the owner has fully depreciated for their own tax purposes, the new purchase allows the buyer to step up the value of the equipment and begin the process of depreciation anew. With a stock sale, this is not possible ...
Can a buyer include accounts receivable in the sale price?
Buyers also have control over the assets included in the sale. For example, since accounts receivable is an asset, the buyer can decline to include it in the sale price if they feel it is of no value due to unsuccessful collection attempts. Anyone purchasing a business needs to conduct due diligence to make sure they fully understand the value ...
How It Works
In a bought deal, the underwriter purchases the entire offering from the issuer company. As the entire offering is purchased, financing risk Risk In finance, risk is the probability that actual results will differ from expected results. In the Capital Asset Pricing Model (CAPM), risk is defined as the volatility of returns.
Example of a Bought Deal
An issuer company is looking to offer 40 million shares. The projected market value per share is $10, but there is no guarantee that all shares of the issuer company would be purchased.
Advantages of a Bought Deal
A bought deal offers several advantages to both the underwriter and the issuer company.
Disadvantages of a Bought Deal
A bought deal comes with a few disadvantages for the underwriter and the issuer company.
Bought Deal in a Press Release
Bought deals are common to see in the news. For example, the following is an excerpt of a press release involving The Flowr Corporation ( TSX.V: FLWR ). From the discussion above, readers should be able to interpret that the underwriters are purchasing 10,610,000 units of The Flowr Corporation at a price of $4.10 per unit (valued at $43,501,000).
Related Readings
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How does a stock sale work?
Through a stock sale, the buyer purchases the selling shareholders’ stock directly thereby obtaining ownership in the seller’s legal entity. The actual assets and liabilities acquired in a stock sale tend to be similar to that of an assets sale. Assets and liabilities not desired by the buyer will be distributed or paid off prior to the sale. Unlike an asset sale, stock sales do not require numerous separate conveyances of each individual asset because the title of each asset lies within the corporation.
What is asset sale?
An asset sale is the purchase of individual assets and liabilities, whereas a stock sale is the purchase of the owner’s shares of a corporation. While there are many considerations when negotiating the type of transaction, tax implications and potential liabilities are the primary concerns. If the business in question is a sole proprietorship, ...
Why are asset sales taxed higher?
For sellers, asset sales generate higher taxes because while intangible assets, such as goodwill, are taxed at capital gains rates, other “hard” assets can be subject to higher ordinary income tax rates.
What is considered asset sale?
In an asset sale, the seller retains possession of the legal entity and the buyer purchases individual assets of the company, such as equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, telephone numbers, and inventory. Asset sales generally do not include cash and the seller typically retains the long-term debt obligations. This is commonly referred to as a cash-free, debt-free transaction. Normalized net working capital is also typically included in a sale. Net working capital often includes accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses.
Why do buyers prefer asset sales?
In addition, buyers prefer asset sales because they more easily avoid inheriting potential liabilities, especially contingent liabilities in the form of product liability, contract disputes, product warranty issues, or employee lawsuits. However, asset sales may also present problems for buyers.
How long does goodwill amortize?
By allocating a higher value for assets that depreciate quickly (like equipment, which typically has a 3-7 year life) and by allocating lower values on assets that amortize slowly (like goodwill, which has a 15 year life), the buyer can gain additional tax benefits.
What risks do buyers take when buying stock?
Additionally, buyers may accept more risk by purchasing the company’s stock, including all contingent risk that may be unknown or undisclosed. Future lawsuits, environmental concerns, OSHA violations, employee issues, and other liabilities become the responsibility of the new owner.
