Five Reasons to Structure Your Acquisition as an Asset Purchase

There are many considerations that go into the acquisition process of a private company. From the outset, it’s important to have an acquisition structure that aligns with your goals. The two structures I see most often are asset and stock/share purchases. While each has its inherent advantages and disadvantages, most of my clients have chosen the asset purchase as their preferred structure. Below are five reasons why an asset purchase structure may make sense for your acquisition:

1.     Liability Protection. One of the main benefits of an asset purchase is that the purchaser can choose the assets and liabilities it wants to acquire from the seller. This differs from a stock purchase, where the buyer assumes all liabilities associated with the seller’s company through the purchase of the seller’s shares of stock. While many of these liabilities are often the assumption of the seller’s contracts, they could also include tax obligations and lawsuits. Careful due diligence and drafting of the asset purchase agreement can help a purchaser in an asset acquisition avoid any implied liabilities.

2.     Avoidance of Stock/Shareholder Disputes. Since the purchaser in an asset acquisition is only purchasing certain assets and liabilities from the seller, approval from the seller’s shareholders is only required if all or substantially all of the seller’s assets are being sold. Therefore, the purchaser can structure the purchase to avoid addressing any governance issues or stock/shareholder disputes.

3.     Flexibility in Asset Selection. By choosing to purchase only certain assets and liabilities, the purchaser can select assets that are compatible with its business model. This allows the purchaser to customize the transaction to make the most efficient use of its capital.

4.     Tax Benefits. In an asset sale, the purchaser can allocate the purchase price across the acquired assets. This is especially common in the acquisition of equipment and intellectual property, where stepping up the tax basis of the acquired assets lowers the purchaser’s taxable income through depreciation and amortization.

5.     Simplifying the Future of the Purchaser. By acquiring assets rather than stock/shares of the seller, the purchaser makes it easier to implement changes in its business. Selling a portion of a business’s assets is much simpler than selling shares because it avoids complex corporate issues, such as needing to obtain shareholder approval.

An asset purchase can offer greater flexibility and specificity, but it may not be suitable for every situation. With careful planning and attention to detail at the outset, this type of deal can have significant benefits both in the short and long term to the purchaser. To ensure the deal is structured effectively, it's crucial to consult with an experienced attorney who can help guide the process and address potential complexities.