Difference Between Asset Purchase and Stock Purchase

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Mergers and acquisitionMergers And AcquisitionMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.read more, which also refer to inorganic growth, are the buying and selling of companies with their advantages. In any merger and acquisition transaction, the owner and investors choose whether to do the company’s asset or stock purchase transaction. The buyer of the asset – the acquirer – and the seller of the asset – the target- can have their reasons and explanations to opt for either one type of transaction or another.

  • The asset purchase transaction is where the buyer purchases individual company assets like goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more, equipment inventory, etc. These assets are valued by the valuation experts who the company appoints. However, in this method, the parties can discuss which assets to acquire and which liabilities to assume, making the method more structured and complicated as more over-the-counter negotiations occur. Sometimes the deal is not scrapped altogether because the parties don’t mutually consent.The stock purchase is mainly related to acquiring the company’s stocks wherein the buyer becomes the company’s owner. In this purchase method, the company purchases the common stock of the target company and hence enjoys voting rights and ownership of the business.

Asset Purchase vs. Stock Purchase Infographics

Key Differences

  • Under the asset purchase transaction, there is no transfer of business ownershipBusiness OwnershipBusiness 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. In contrast, the company’s ownership is transferred to the buyer in a stock purchase method.The asset purchase transaction is generally quite simple and easy compared to a stock purchase transaction.In an asset purchase transaction, the buyer can choose the liabilities he is willing to bear in his balance sheet. But in the case of a stock purchase transaction, the buyer or the acquirer needs to observe every business liability in its balance sheet.Under the stock purchase transaction, the buyer may avoid paying transfer taxTransfer TaxTransfer Tax is defined as a charge imposed on the transferor of a particular asset including real estate or other revenue-generating assets at the time of transfer of such asset to a transferee. It is generally included in the cost of such asset at the time of its sale.read more, but the buyer is obligated to pay taxes in an asset purchase transaction.Under asset purchase, goodwill acquired by the business can be amortized over five years. Hence the company can reap tax benefits, but it cannot be done under the stock purchase method.The buyer can select the asset method employees need 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 amortizationAmortizationAmortization of Intangible Assets refers to the method by which the cost of the company’s various intangible assets (such as trademarks, goodwill, and patents) is expensed over a specific time period. This time frame is typically the expected life of the asset.read more over the purchased assets.

Comparative Table

Advantages of Stock Purchase

  • Buying under the stock purchase method saves the cost of revaluations of assetsRevaluations Of AssetsAssets revaluation is an adjustment made in the carrying value of the fixed asset, either upwards or downwards, depending upon the fair market value of the fixed asset. Its purpose includes selling the asset to another business unit, merger and acquisition.read more and other things associated with the business.The buyer may also be able to avoid any liability for tax transfers.Stock Purchase is more often used than asset acquisition and is less complex when compared to an asset purchase.

Advantages of Asset Purchase

  • Buying unBuying under the stock purchase method saves the cost of revaluations of assetsRevaluations Of AssetsAssets revaluation is an adjustment made in the carrying value of the fixed asset, either upwards or downwards, depending upon the fair market value of the fixed asset. Its purpose includes selling the asset to another business unit, merger and acquisition.read more and other things associated with the business.Other than the stocks, when an asset is purchased, the buyer clarifies the problems presented by minority shareholders refusing to sell their shares.In an asset purchase, the buyer can specify the liabilities they are willing to assume while leaving behind the other weaknesses. On the other hand, the buyer purchases stock in a company with unfamiliar or uncertain liabilities in a stock purchase.

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. It also depends on the target company they wish to acquire. For example, if the company has more liabilities than valuable assets, it is better to pursue a stock acquisition rather than 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, it is advisable to go for an asset purchase. This is because it will reap benefits in the long run for the company.

Businesses can also seek professional advisors like investment bankers or valuations experts who can provide numerous alternatives for companies looking for inorganic growth in their industry or even entering into a new industry altogether. Companies are looking for inorganic growth to expand their operations and reap benefits.

This article has been a guide to asset purchase vs. stock purchase. Here we discuss the top differences between an asset and stock purchase along with infographics and a comparison table. You may also have a look at the following articles –

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