Mergers and Acquisitions - Buying and Selling Corporate Businesses
The purchase and sale of an on-going corporate business can be structured in various ways. The structure utilized will result in different tax and liability consequences for both the seller and buyer of the business involved. This article outlines three basic ways in which a sale of a business by a corporation can be arranged; asset sale/purchase, stock sale/purchase and merger. It discusses the relative advantages and disadvantages to the selling and buying parties for each kind of transaction.
One common way in which a corporate business sale can be arranged is through a purchase and sale of the business assets by the selling corporation itself. These assets can include tangible items such as inventory and equipment, as well as intangible assets such contract rights, trademarks/tradenames, and similar items. An asset purchase transaction can also include the transfer by the selling corporation and assumption by the purchaser of certain on-going obligations and liabilities, but this need not be the case. From the prospective of the buyer, an asset purchase arrangement can have its several advantages. For example, with an asset deal, the buyer is not required to assume all of the obligations and liabilities of the seller, although certain of these can be assumed if both parties agree to that. This allows the buyer to pick and choose those on-going obligations and liabilities of the selling corporation the buyer is willing to accept in the particular instance. Another potential advantage to a buyer of an asset purchase transaction is the ability to obtain the tax benefits of depreciating certain of the acquired assets. This benefit generally is not available to a buyer in a stock purchase (discussed below).
As second way to sell an on-going corporate business is a stock purchase. Under this kind of arrangement, the buyer purchases all the outstanding shares of capital stock of the corporation from its stockholders. This mechanism essentially amounts to buying the entire corporation with ownership of its tangible and intangible business assets remaining with purchased corporation itself. This structure generally transfers the entire corporation, lock, stock and barrel, including all of its assets, obligations and liabilities, resulting in the potential disadvantage to the purchaser of obtaining all the liabilities of the purchased corporation. Another potential disadvantage to the buyer in a stock purchase deal is the inability to obtain tax benefits from depreciating the corporation's assets, as can be done in an asset purchase arrangement.
A third basic way in which a corporate business is sold is through a merger. In a merger transaction, the entire selling corporation, including all of its assets and liabilities, are absorbed by and become part of the acquiring corporation. Following the merger, the separate corporate existence of the selling company ceases and its assets, liabilities and on-going business operations become part of the acquiring corporation which survives following the merger. Like a stock purchase transaction, the merger generally results in all assets and liabilities being transferred to the acquiring company. Additionally, the tax treatment of a merger is similar to that of a stock purchase transaction.
A variety of factors influence the negotiations between a prospective buyer and seller regarding the structure they agree to for the business sale involved. Generally, because of the potential benefits to a buyer under an asset purchase transaction, the purchase price tends to be higher when this structure is utilized than with a stock purchase or merger.
