why use a stock purchase agreement over a acquisition agreement

Full Answer

What is the difference between a stock purchase agreement&asset purchase?

A stock purchase agreement is separate from an asset purchase agreement. Stock purchase agreements merely sell shares of the company to raise money or transfer ownership of shares. An asset purchase agreement finalizes the sale of the company's assets.

What is a stock acquisition and how does it work?

What is a Stock Acquisition? In a stock acquisition, a buyer acquires a target company’s stock directly from the selling shareholders. With a stock sale, the buyer is assuming ownership of both assets and liabilities – including potential liabilities from past actions of the business.

What is an agreement of sale of stock?

This agreement proves that the sale and the terms of it were agreed upon mutually. The stock purchase agreement is an agreement in which all terms and conditions are finalized when it comes to the sales and the purchase of the shares of the company.

When do you need a share purchase agreement?

If a corporation or individual is purchasing or selling shares in the company with another business or person, they should use a share purchase agreement. As an example, if a business has two partners who have equal shares and one leaves the partnership, a share purchase agreement can be used to buy their stocks in the business.

When would you use a stock purchase agreement?

A stock purchase agreement is an agreement that two parties sign when shares of a company are being bought or sold. These agreements are often used by small corporations who sell stock. Either the company or shareholders in the organization can sell stock to buyers.

What is the difference between a stock acquisition and an asset acquisition?

In an asset acquisition, the buyer is able to specify the liabilities it is willing to assume, while leaving other liabilities behind. In a stock purchase, on the other hand, the buyer purchases stock in a company that may have unknown or uncertain liabilities.

When would it be more advantageous for a purchaser to acquire a company's assets rather than its shares?

The Advantages of an Asset Purchase Most buyers prefer asset deals due to the tax advantages they can secure. For example, if they're purchasing a company with assets that are highly depreciated, the buyer can “step up” the tax value of those assets and depreciate or amortize them.

Is an asset purchase agreement an acquisition?

An asset purchase agreement is an agreement between a buyer and a seller to purchase property, like business assets or real property, either on their own or as part of a merger-acquisition.

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.

Why might a buyer prefer an asset sale to a stock sale?

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.

Why might a company only acquire another company's assets rather buying the entire company?

In an asset acquisition strategy a company chooses the assets, and sometimes liabilities, it wishes to obtain, as opposed to a traditional acquisition where it buys the entire company. Choosing the specific assets and liabilities reduces risk and potential losses.

Can you amortize goodwill in a stock purchase?

Only an asset purchase provides the buyer with a tax benefit related to paying a premium for the purchase of these intangibles. Typically, the buyer of assets is eligible for a tax deduction through amortization of the premium (goodwill) paid over a 15-year period. That's not the case in a stock sale.

Is it better to buy shares or assets?

For the buyer, one advantage of purchasing a company's shares is that the price of acquiring the company through shares will usually be lower than acquiring it through asset purchase. When purchasing shares, the buyer does not need to compensate the seller for the remaining taxes that need to be paid.

What is stock purchase agreement?

Stock purchase agreements (SPAs) are legally binding contracts between shareholders and companies. Also known as share purchase agreements, these contracts establish all of the terms and conditions related to the sale of a company's stocks.

What is a stock purchase acquisition?

What is a Stock Acquisition? In a stock acquisition, a buyer acquires a target company's stock directly from the selling shareholders. With a stock sale, the buyer is assuming ownership of both assets and liabilities – including potential liabilities from past actions of the business.

Why do I need an asset purchase agreement?

This is because an asset purchase enables a buyer to pick exactly which assets they are buying and identify precisely those liabilities they wish to take over. It is important to identify what exactly is being purchased. Assets transferred as part of an Asset purchase agreement may include: plant and machinery.

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 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 is the difference between asset acquisition and asset acquisition?

When buying or selling a business, the owners and investors have a choice: the transaction can be a purchase and sale of assets. Asset Acquisition An asset acquisition is the purchase of a company by buying its assets instead of its stock. It also involves an assumption of certain liabilities. or a purchase and sale of common stock.

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 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.

Why is a stock purchase agreement important?

Examples of Why a Stock Purchase Agreement Is Important. The purchaser may expect to receive dividends on their investment. They could later claim that they were promised certain dividends if there's no stock purchase agreement in place. Dividends can be fully explained when an agreement is in place.

What is a stock purchase agreement?

A stock purchase agreement is the agreement that two parties (the company or shareholders and buyers) sign when shares of a company are being bought or sold. 7 min read

What is the first section of a stock purchase agreement?

The first section of your stock purchase agreement is often referred to as the preamble. In this section, the agreement will be named, the parties identified, and the date of the contract will be set. In the preamble , you will often see parties referred to as "seller" and "purchaser."

What happens if you leave a company without a stock purchase agreement?

Without a stock purchase agreement, they can sell these to company outsiders without asking other shareholders. With an agreement, a “right of first refusal” clause can be created.

Can a witness sign a stock agreement?

A witness can sign too if you don't know the purchaser well or have reason to think they may pull out of the agreement. Make copies of the signed document for the purchaser and company. After the purchaser pays for stock, give them certificates that represent the company's stock.

What is a stock acquisition?

A stock acquisition includes everything on the balance sheet, both assets and liabilities. If the buyer needs a tax write-off, this may be a viable option. A stock sale involves buying the entire entity, so past financial and legal liabilities are included, creating significant exposure for the buyer. Thus, financial debt.

What does a buyer see in a stock acquisition?

In considering a stock acquisition, a buyer may see the potential for growth in value of the company’s stock as it stands and/or may feel that the current and future liabilities of the business are minimal or can be adequately managed. Since the buyer in a stock sale takes all of the business assets as a whole without the necessity ...

What is a carryover basis?

Carryover basis means that the buyer steps into the shoes of the target and continues to account for the assets and liabilities as if the target had no change in ownership. Therefore, if goodwill.

What does it mean when a stock sale is a sale?

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 and the business continues on. Compare this to the other method of acquisition, an asset deal.

Why do you sell stock?

One reason for a stock sale is when there is a right, license, or exclusive distributorship that cannot be otherwise transferred. Further, there is no purchase price allocation issue to deal with from a tax perspective. The tax attributes of the assets and liabilities in a stock acquisition get a carryover basis for tax purposes.

Why do you prefer a stock sale?

Since the buyer in a stock sale takes all of the business assets as a whole without the necessity of transferring ownership of each one, the buyer may prefer a stock sale if the transfer of individual assets may prove to be impractical or costly. These strategic decisions are part of the duties of corporate finance roles.

What is it called when you own stock?

An individual who owns stock in a company is called a shareholder and is eligible to claim part of the company’s residual assets and earnings (should the company ever be dissolved). The terms "stock", "shares", and "equity" are used interchangeably. directly from the selling shareholders.

What is asset acquisition?

In an asset acquisition, the buyer is able to specify the liabilities it is willing to assume, while leaving other liabilities behind. In a stock purchase, on the other hand, the buyer purchases stock in a company that may have unknown or uncertain liabilities. It is necessary for the selling company's assets to be re-titled in the name ...

What is asset purchase?

An asset purchase involves the purchase of the selling company's assets -- including facilities, vehicles, equipment, and stock or inventory. A stock purchase involves the purchase of the selling company's stock only.

How long does goodwill amortize?

Goodwill can be amortized by the buyer for tax purposes over a period of fifteen years. In states that impose sales or transfer taxes on the sale of assets, a stock transaction can avoid some or all of these taxes that apply in the event of an asset transaction.

Do you have to retitle a company's assets in the name of the buyer?

It is necessary for the selling company's assets to be re-titled in the name of the buyer. This is not required in a stock transaction. If the purchase price exceeds the aggregate tax basis of the assets being acquired, the buyer receives a stepped-up basis in the assets equal to the purchase price.

What is a share purchase agreement?

A share purchase agreement is defined as a legal contract between a seller and a buyer. They may be referred to as the vendor and purchaser in the contract. The specific number of shares are listed in the contract at the stated price. This agreement proves that the sale and the terms of it were agreed upon mutually.

What is the meaning of "interpretation" in a stock purchase agreement?

Interpretation is covered in the stock purchase agreement, which gives the definitions for all terms used in the agreement. The sale and purchase of stock is also listed, which covers adjustments in purchase prices, itemizes the purchase price, and how to resolve disputes.

What are warranties and representations of the buyer and seller?

The warranties and representations of the buyer and seller give all the statements that the buyer and seller sign and claim to be true. Anything related to employees is also covered, including what the terms of their benefits are and how accrued bonuses are handled.

What is an indemnification agreement?

Indemnification agreement over costs that are unforeseen. A letter of intent is formed before the agreement is finalized to explain the proposed sale. A buyer needs to have due diligence and should make sure the purchase agreement and the letter of intent have the same terms.

What are the two types of shares?

There are usually two types of classes and shares that define shares. The main ones are voting and non-voting. Voting shares let the shareholder voice an opinion on the board of director's decisions and on corporate policy.

Should the sale and purchase section of a letter of intent have the same terms?

The sale and purchase section should have the exact same terms that the letter of intent has. If any differences are found, this is probably due to buyer due diligence and needs to be negotiated before the share purchase agreement is complete. The warranties and responsibilities need to be checked to make sure there is not any statement that's ...

Why do you pay with acquirer stock?

For buyers without a lot of cash on hand, paying with acquirer stock avoids the need to borrow in order to fund the deal. For the seller, a stock deal makes it possible to share in the future growth of the business and enables the seller to potentially defer the payment of tax on gain associated with the sale.

What is a stock deal?

In stock deals, sellers transition from full owners who exercise complete control over their business to minority owners of the combined entity. Decisions affecting the value of the business are now often in the hands of the acquirer.

Do acquirers have to borrow money?

Acquirers who pay with cash must either use their own cash balances or borrow money. Cash-rich companies like Microsoft, Google and Apple don’t have to borrow to affect large deals, but most companies do require external financing. In this case, acquirers must consider the impact on their cost of capital, capital structure, credit ratios and credit ratings.

Can a seller defer paying taxes on a deal?

Meanwhile, if a portion of the deal is with acquirer stock, the seller can often defer paying tax. This is probably the largest tax issue to consider and as we’ll see shortly, these implications play prominently in the deal negotiations. Of course, the decision to pay with cash vs. stock also carries other sometimes significant legal, tax, ...

What Factors Are Taken Into Consideration?

Tax Implications

How Are Stock Acquisition Strategies used?

• In considering a stock acquisition, a buyer may see the potential for growth in value of the company’s stock as it stands and/or may feel that the current and future liabilities of the business are minimal or can be adequately managed. Since the buyer in a stock sale takes all of the business assets as a whole without the necessity of transferring ...

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