As the industry changes, businesses are trying to strategize to conform to the changing market. Business owners thinking of selling their business need to determine the type of sale that is right for them. This article is going to explain four common types of acquisitions. In future articles, we will discuss these deals in more detail. However, it is important to determine what deal works best for your company.
Asset Purchase
An asset purchase is when a buyer acquires all assets and rights related to the business. Under this deal, the buyer can specify the assets that are to be bought. Buyers typically favor this deal because they can choose the assets they wish to acquire while leaving out the assets they don’t. Although separating assets might attract buyers to this type of sale, sometimes separating assets can be difficult. Furthermore, under this sale, the buyer and seller have to determine how to handle the liabilities. Therefore, the advantage to buyers is that they can limit their liability. Asset purchases typically do not include cash, long-term debt obligations, shares or the actual company because the buyer is buying assets separately. This makes asset purchases simpler in the long-run. Another advantage is the tax break associated with an asset purchase. Under an asset purchase, the buyer can obtain tax deductions for the depreciation and or amortization for the assets over their current tax values. Furthermore, for tax purposes, goodwill can be amortized on a straight-line basis over 15 years. Goodwill is an intangible asset that can make your company more valuable. Examples of goodwill include: licenses, proprietary technology, good customer relationships, talent, reputation, and trade secrets.
However, these advantages to the buyer can come with disadvantages to the seller. Although the buyer has some tax advantages in an asset purchase, the tax cost to the seller is usually higher. Therefore, the seller may ask for a higher purchase price. Furthermore, if the buyer chooses not to purchase some assets or assume some liabilities the seller will need to liquidate those assets and assume those particular liabilities.
Stock Purchase
In a stock purchase, the buyer purchases stock from the target company’s current stockholders. In this sale, there is a change of ownership with the target company remaining intact. This type of sale is appealing to buyers because it is simple. A stock purchase is simpler than an asset purchase. Here, the buyer purchases the entire entity, its assets, and liabilities. Unlike an asset purchase where all the assets and liabilities are divided up and sold separately. In a stock purchase, the buyers may be able to avoid transfer taxes. However, buyers will lose some of the tax benefits that come with an asset purchase. Buyers in a stock purchase can usually assume non-assignable licenses and permits without specific consent. Furthermore, the acquirer can save time and money reevaluating the business or retitling the individual assets.
Although a stock purchase is simpler, a disadvantage to that is the only way to get rid of unwanted liabilities is to create separate agreements where the target company can take those liabilities back. Furthermore, unlike an asset purchase goodwill is not tax-deductible when it exists as a share price premium.
Merger
In a merger, two companies combine to form one legal entity and the combined company has all the assets of the two companies. Merging two companies can help your business penetrate a new market, boost your financial power and grow your company quickly. Merging two companies makes the new company stronger and able to fulfill their customers needs. In Florida, unless your company’s articles of incorporation require a greater vote, the majority of shareholders have to approve the merger. Fl. Stat. Ann. tit. XXXVI §607.1103 (5) (2019). Business may also be thinking about a merger for the advantage of vertical integration. Vertical integration will help businesses control their upstream and downstream.
Disadvantages to mergers include business integration and disruption. It can be challenging for businesses to merge their systems, processes, operations, and employees. Problems can occur when trying to combine the two companies.
Tender Offer
A tender offer is typically a public solicitation by a company to purchase a percentage of the target company’s securities. This type of sale happens when the buyer makes a public offer to all the target’s shareholders to acquire their shares. Tender offers invite shareholders to sell their shares for a specified price over a specific window of time. Tender offers are regulated by the SEC as well as the Exchange Act of 1934. In a tender offer, the investor usually offers a higher price per share than the company stock price. This gives the shareholders more incentive to sell their shares. An advantage to tender offers is that sellers can monetize their equity without waiting for the company to go public or get acquired. Furthermore, this can be attractive to employees due to the opportunity to receive cash for their stock and options. In some cases sellers can even sell for more than the shares are currently worth.
A disadvantage to tender officers occurs if the shares become more valuable later. In that case, sellers could lose out on additional growth. Furthermore, if you exercise and sell in one transaction, you lose out on the favorable tax treatment of ISOs. Sellers lose out on favorable tax treatment in those cases because they do not meet the holding period requirements. Tender offers can also be time consuming and costly. Furthermore, acquirers may have to deal with potential holdouts because the acquirer must convince all of the shareholders to sell their stock.
These different types of sales all value different things. Buyers and sellers need to determine which type of sale is right for them. Furthermore, buyers and sellers need to determine what they value the most out of a business. Once that is determined, buyers and sellers can start to strategize on how they will approach the sale. As discussed earlier, our future articles will go into each deal in more depth.