Difference Between Asset Purchase and Stock Purchase
In case of the asset purchase, the buyer purchases the specific assets and the specific liabilities of the company which it wants and there is no transfer of the business ownership, whereas, in case of the stock purchases, it is compulsory for the buyer to take all the assets and the liabilities of the seller company and there is full transfer of the business ownership.
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Mergers and acquisition, which also refers to inorganic growth, is the buying and selling of companies that have their advantages. In any transaction of merger and acquisition, the owner and investors have a choice whether to do the transaction in an asset purchase or to purchase the common stocks of the company. The buyer of the asset, which is the acquirer, and the seller of the asset, which is the target, can have their reasons and explanations to opt for either one type of transaction or another.
- Asset purchase transaction where the buyer purchases individual assets of the company like goodwill, equipment inventory, etc. The assets are being valued by the valuation experts who are appointed by the company. However, in this method, the parties can discuss which assets to acquire and which liabilities to assume, which makes the method more structured and is more complicated as more negotiations over the counter take place and sometimes the deal is not scrapped altogether because the parties don’t reach to mutual consent.
- The stock purchase is mainly related to the acquisition of stocks of the company wherein the buyer becomes the owner of the company. In this method of purchase, the company purchases the common stock of the target company and hence enjoy voting rights and ownership of the business.
Asset Purchase vs. Stock Purchase Infographics
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Source: Asset Purchase vs Stock Purchase (wallstreetmojo.com)
Key Differences
- Under the asset purchase transaction, there is no transfer of ownership of the businessOwnership Of The BusinessBusiness structure is the legal framework adopted by a company to execute business activities in compliance with the corporate rules and regulations. An organization can be a sole proprietorship, partnership, limited liability company or corporation.read more to the buyer, and the seller remains in full ownership of the business. In contrast, in a stock purchase method, the ownership of the business is transferred to the buyer in the case.
- The asset purchase transaction is generally quite simple and easy when compared to a Stock purchase transaction.
- In an asset purchase transaction, the buyer has an option to choose the liabilities which he is willing to bear in its balance sheet. But in the case of a stock purchase transaction, the buyer or the acquirer needs to observe every liability of the business in its balance sheet.
- Under the stock purchase transaction, the buyer may avoid paying transfer tax, but in an asset purchase transaction, the buyer is obligated to pay taxes.
- Under asset purchase, goodwill acquired by the business can be amortized over a period of five years; hence a business can reap tax benefits from it, but it cannot be done under the stock purchase method.
- The buyer can select under the asset method which employee they need to retain without impacting their unemployment rates.
- The main advantage of asset purchase overstock purchase is that the buyer can obtain a tax deduction for depreciation and amortization over the assets he has purchased.
Comparative Table
| Asset Purchase Method | Stock Purchase Method | |
| No transfer of ownership of the business | Full transfer of ownership of the business | |
| Businesses can claim tax benefits under this method. | Businesses cannot claim tax benefits can this method. | |
| Less complexity in the method can companies do not have to comply with the securities law business. | A more complex method, as regulatory compliance is mandatory when buying a company. | |
| Employee agreements with key employees may need to be re-negotiated | Employee agreement need not be re-negotiated | |
| The buyer has the right to choose the risks and the liabilities that he is ready to bear | Under this, the buyer needs to absorb all the risks and the liabilities of the business. | |
| The ownership under this method is not lost and does not exchange hands. | Under this method, the ownership is lost and exchanges hands. | |
| Less prevalent in the market | More prevalent in the market |
Advantages of Stock Purchase
- Buying under the Stock Purchase method saves the cost of costly revaluations of assets and other things with the business
- Buyer may also be able to avoid any liability for transfer taxes
- More often used than asset acquisition and is less complex in nature when compared to an asset purchase
Advantages of Asset Purchase
- The Buyer can receive a tax benefit as he can amortize the goodwill over the years
- Other than the stocks when an asset is purchased, the buyer tends to keep clear with the problems presented by minority shareholders refusing to sell their shares
- In an asset purchase, the buyer is able to specify the liabilities it is willing to assume while leaving behind the other liabilities. On the other hand, in a stock purchase, the buyer purchases stock in a company that may have unfamiliar or uncertain liabilities.
Conclusion
In Asset Purchase vs. Stock Purchase, whether to go for an asset purchase transaction or a stock acquisition method depends on the company’s goals and objectives, and it also depends on the target company that one is acquiring. If the company has more liabilities than any good valuable assets, then it is better to go for a stock acquisition rather than going for an asset purchase. However, if the company has more liabilities, but the assets that the company has on its balance sheet are valuable for the buyer, then it is more advisable to go for an asset purchase. It will reap a benefit in the long-run of the company.
Businesses can also seek professional advisors like investment bankers or valuations experts who have many options for companies looking for inorganic growth in their industry or even looking to enter into a new industry altogether. Inorganic growth nowadays is the one which companies are looking for to expand their operations and reap benefits.
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