M&A Financing: Choose an Asset or a Stock Deal
One often-overlooked area of M&A is the question of what exactly Buyer is buying. Companies themselves aren’t really sold, per se; instead, Buyer is acquiring either certain assets of the company (in an asset deal) or the company’s stock (in a stock deal).
Buyers prefer asset deals over stock deals because the former are a lot cleaner logistically. The assets involved may or may not constitute the entire company and often include intangibles such as company name, domain names, customer lists, work in progress, sales pipelines, and so on.
Asset deals are cleaner because Buyer is essentially picking and choosing what she wants to buy. She picks the good assets and leaves behind the bad assets and some (or perhaps all) of the liabilities. Most often, Buyer does assume certain liabilities relating to working capital. A smart Buyer makes sure any assumed liability is current (or within terms).
The big perceived advantage for Buyer in an asset deal is successor liability. If Buyer acquires the stock, any past misdeeds of the company are a liability for the new owner. In some cases, an asset deal may help shield Buyer from the past misdeeds of Seller, but that’s not always the case. Stringent representations and warranties and an escrow account help mitigate this concern, but the risk never completely goes away.
The assignability of contracts (Buyer’s ability to enforce contracts originally signed by Seller) is often in question with asset deals. Buyer may want to consider the risk of losing contracts as the result of an asset deal. The contract is with the company, not the assets!
Sellers usually don’t like asset deals because those deals pose the risk of double taxation. Proceeds from the sale first go to the company, which may have to pay a capital gains tax on those proceeds. The remainder of that money is then paid out to Seller, who in turn may have to pay tax on that after-tax amount.
For that reason, Sellers prefer stock deals. In a stock deal, owners of the company’s stock sell those shares to Buyer and in most cases face just one layer of tax (which is hopefully the capital gains rate). Unless Buyers want to increase the purchase price to offset the higher taxes of an asset deal (and some Buyers will do that), they need to get themselves comfortable with the possibility of stock deals.
Regardless of which side you’re on, talk to your legal and tax advisors, who can advise you appropriately on a case-by-case basis.