Acquiring a company - Asset Purchases v Stock Purchase

Acquiring a company: Asset Purchases v Stock Purchase

When purchasing a company, traditionally the buyer can only purchase the assets of the company, or they can only purchase the capital stock of the business. There are advantages and disadvantages to both plans, and the option chosen will typically depend on what the buyer is searching for.

Understanding the Differences

A buyer purchasing the assets of a business will buy the physical property owned by the company. This could include buildings, vehicles, furniture, goodwill, equipment, and inventory. There would also typically be an agreement on the assumption of certain predefined liabilities by the buyer.

A stock purchase would consist of the transfer of the ownership of the business. The buyer would typically not purchase the physical assets of the company. The assets would remain under the ownership of the original entity, and the seller would retain the assumption of all liability.

The Advantages of an Asset Purchase

When a buyer purchases a company's assets, they can take a step-up in the basis valuation of those assets. Traditionally this means the buyer can deduct the value, or a percentage of the value, of the assets at the time of purchase through depreciation on their tax return. In some cases, the depreciation can be taken at once for the asset's full value. In other circumstances, it could be more advantageous to spread the depreciation deduction over several years. The amount of time will depend on the type of asset and the method used to depreciate it.

The goodwill of the company, which is its value above the assets, can also be deducted over an amortized period on the tax return. This allows for a deduction of an intangible asset which the buyer had to pay.

The buyer also has the unique opportunity under the asset sale to decide which employees to keep and which ones to let go. This could be especially advantageous to make these decisions at the time of the purchase because it does not affect the new buyer's unemployment rate.

Advantages of a Stock Purchase

The valuation process of a stock purchase typically is not as complicated since the buyer is not purchasing assets. The buyer and seller usually only have to agree on the stock price, while an asset sale requires the buyer and seller to agree on valuations of many different assets, including goodwill.

Most states and local governments require transfer taxes to be paid on assets when they are sold. No transfer taxes are required for most stock sales. This could save the buyer a tremendous amount of money, depending on the assets' valuation and the transfer tax payment required.

Making Sense of an Acquisition Purchase

At Fusions CPA, we understand how important acquisition accounting and acquisition bookkeeping is to a business-related purchase. This is true whether the purchase is of assets only or company stock. Some guidelines must be followed to properly integrate assets and stock into financial records and reconcile them accordingly. Mistakes during this critical time could result in unnecessary taxation and missed opportunities for tax planning.

Acquisition accounting can help ensure a smooth transaction by defining the purchase and the forward financial planning goals. It will also help identify who will serve as the acquirer that will hold control of the new assets or stock and determine both the transaction's current and future costs. A mistake during this critical time could cost both the purchaser and seller for years to come.

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