Benefits of acquiring another company's assets?

We are looking into acquiring a small company with a few employees and little revenue, but valuable intellectual property and patents. What are the legal benefits of structuring the deal as an acquisition of essentially all the assets of the company as opposed to structuring it as a stock acquisition?


Corporate Questions

in California Posted 6 years, 6 months ago

13 Responses

Profile Picture of Mazyar Hedayat
Mazyar Hedayat

Principal at M. Hedayat & Associates PC

There are a number of benefits to structuring an acquisition as an asset purchase as opposed to a stock purchase. While the specifics can get tedious, the upshot is this: buying the stock of another company means stepping into its shoes. In a stock purchase the acquirer takes the good, the bad, and the ugly, including liabilities it never planned for and has no way of dealing with: a good example is environmental liability. By contrast, asset purchases allow the acquirer to be choosy and evaluate what it is buying - item by item if it wishes to do so. Asset purchases also allow the buyer to set aside the assets that it does not wish to purchase. While there is more to this topic, the above constitutes the basics and is a good primer on the topic. Feel free to contact my office with specific questions.

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Profile Picture of Paul Vargas
Paul Vargas

President/Attorney at Vargas Law, APC

As a tax prospective addition to the excellent answer provided by Mazyar, there are tax benefits to the seller to making the deal an asset purchase. The purchase price to each itemized asset will be the new "basis" in the asset and then the company/owners can take depreciation deductions (as applicable) against the new assets starting at the new basis of the asset; as opposed to purchasing the stock, you assume the existing basis of the seller in each asset, which the seller could have taken most or all the deductions on the specific asset prior to the asset sale.

After acquired intangibles, which include patents and other intellectual property, are allowed to be amortized whereas originally created IP (ie copyrights, trademarks) cannot be amortized. There are exclusions and exceptions to think about and each asset and fact needs to be addressed before giving a succinct answer in this forum, but in general those are a few tax benefits to a buyer in an asset purchase.

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Profile Picture of Jeremy Domozick
Jeremy Domozick

Member at The Domozick Law Firm PLLC

In addition to the two answers above--with which I agree completely--there is another potential consideration in terms of the stock being purchased. If you are dealing with multiple shareholders then acquiring the shares could become tricky and certain shareholders could try to hold out. Plus, if you do not buy all the shares, then you may have minority shareholders to deal with after the deal goes through.

On the othe hand, an asset purchase means you only deal with either the officers of the company or at worst, a certain percentage of the shareholders. After the deal is done, you don't have to worry about dealing with any minority interest holders because you have only purchased the assets.

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Profile Picture of Matthew Drain
Matthew Drain

Principal at Law Office of Matthew Drain

The principal benefit, and a compelling one, is that an asset acquisition allows you to avoid responsibility for the prior actions of the acquired company. A stock purchase transfers those actions to you, the acquirer. If the acquired company has a known, or as yet unknown, liability, you "get" it with a stock purchase and "miss" it with an asset acquisition.

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Profile Picture of Richard Graf
Richard Graf

Founder at Graf Business Law

On the opposite side of the ledger, however, are several issues. First, if you do an asset sale of assets that consist primarily of IP and patents, you'll need to file assignments of the patents, trademarks and copyrights with the PTO. Depending on how many of these there are you may run into significant expense in preparing and filing the various transfer papers. Also, if the IP is licensed, you'll need to review each of the licenses carefully to ensure you're not violating the terms by effecting the assignments. Plus, if the Seller's a corporation, it may not be interested in an asset sale, as the result is taxation at two levels - one at the corporate level on the sale and a second at the shareholder level when the after tax amounts are distributed to the shareholders. Talk with your accountant and an experienced M&A attorney who can help guide you through the options and process.

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Profile Picture of Anil Advani
Anil Advani

Managing Partner at Inventus Law

While I agree with most of what's been said here already, there are a couple of other material issues to consider: whether the stock sale requires consent of the customer/third party; also, a stock sale is generally tax beneficial to the seller if it is structured as a tax-free reorg. Therefore, a prudent buyer can negotiate a lower price with the seller, ie., based on a portion of the seller shareholders' tax savings. There may also be sales tax implications in an asset sale, besides the costs of registering IP etc.

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Profile Picture of Jack Nguyen
Jack Nguyen

Counsel at Fortis General Counsel

I think the benefits of a asset deal have been covered. One downside is the consent and ongoing business issue. You've just bought a profitable division of a company with a huge book of business under contract. Can you be sure that those contracts can now be assigned to you? How can you be sure that the counter parties to those contracts won't want to renegotiate their contracts for their consent or worse just terminate the contract. What about the favorable lease they just signed, can that lease be assigned to the acquiror?

One advantage of buying the company outright is that current contracts "should" remain relatively undisturbed. Of course a clever lawyer may include a "change-of-control" provision which capture stock sales, mergers and asset deals. The issue is just more acute when it comes to asset deals.

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Profile Picture of William Glover

William Glover

1. Definitions:
A. Direct Costs
B. Income
C. Net Income
2. Ownership of Inventions and Software
3. Revenue Sharing
4. Commercialization of Inventions and Software
5. Confidentiality
6. Termination

Profile Picture of Tiffany Kahnen
Tiffany Kahnen

Corporate Attorney & Outsourced GC at Four Corners General Counsel

To add to the answers previous listed, a main benefit of an asset sale is the ability to limit the assumption of liabilities. That being said, however, it is imperative to evaluate the situation and jurisdiction of the sale to determine whether such an asset purchase is a sale of substantially all assets of a company. If so, such sale may be subject to compliance with the UCC Section 6 - Bulk Sale laws. If such asset sale is subject to compliance with Bulk Sales laws, it is imperative such compliance is adhered to, in order to provide the buyer protection from seller's creditors. While compliance is often tedious, waiver of compliance or failure to comply may have serious repercussions in terms of an assumption of liabilities. Some parties choose to waive compliance and opt for strong indemnity clauses seeking indemnity from the seller in the event seller's creditors impute liability to buyer. Remember, an indemnity clause is only as valuable as the seller's pockets are deep. Feel free to contact me if you have any further questions.

Tiffany A. Kahnen
Founding Attorney | Four Corners General Counsel
Tkahnen@fourcornersgeneralcounsel.com

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Profile Picture of Ryan Azlein
Ryan Azlein

Partner at Stubbs Alderton & Markiles LLP

As mentioned in other responses, there are a number of benefits both from a liability and tax standpoint. You can limit the liabilities, if any, to be assumed from the target company. There can be tax benefits as well with respect to your basis in the business acquired. On the hand, acquiring the stock of the target company means assuming any historical liabilities they may have as well as their corporate structure.

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Profile Picture of ken tan

ken tan

can we have more replies thanks

Profile Picture of Kenny Leu

Kenny Leu

You could be a little more specific about what you want to know. ;)

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