However, for tax purposes, a stock acquisition does not cause a step-up in tax basis; the net assets keep their same basis since the target remains a separate legal entity.3 Certain tax elections are offered to treat a stock acquisition as an asset acquisition, but these will be discussed later in the article. The article also explains the advantages, disadvantages, and tax implications of each structure, including impacts of the Tax Cuts and Jobs Act (TCJA). In a C corporation or S corporation context, the target company does not generally recognize any gain or loss from the sale of its stock. For asset acquisitions where this situation holds true, the purchase price should be allocated to the individual assets acquired or liabilities assumed based on relative fair value. However, when it comes to the tax consequences, a direct asset purchase generally is the better deal for the buyer, providing a big tax break unavailable in a stock purchase. One disadvantage is the tax basis in acquired assets and liabilities remains unchanged, so the buyer may miss some tax benefits associated with higher depreciation and amortization deductions from appreciated assets. A Section 338(h)(10) election is available only in limited circumstances, and the following conditions (not comprehensive) apply: On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. For these tax reasons, stock acquisitions are generally considered more seller-friendly and statutory mergers taxed as asset acquisitions are more buyer-friendly. On January 1, 2016, the investor company’s common stock had a traded market value of $35 per share, and the investee company’s common stock had a traded market value of $31 … However, the election also results in two levels of tax at the corporate and shareholder level with an immediate gain recognized for stepping up the basis. Assume the purchase price equals the fair market value of the identifiable assets of the target. The transaction is often taxed as an asset acquisition of the target, with the target being subsequently dissolved. We know this because the announcement press release, merger agreement and merger proxyall describe how Microsoft is buying Linkedin shares. What Types of Business Entities Can an LLC Own? Sellers prefer allocating the purchase price to assets with a higher tax basis—which results in a lower taxable gain—and to capital assets7 rather than ordinary8 assets. In the M&A environment, there are many methods of structuring an acquisition which can become quite complex. EIDL Round 2 — SBA Extends Covid-19 Loans, How To Structure Multiple Businesses Under One Roof, 4 Things To Do to Prepare to Sell Your Business. (In the sale of an S-corporation, partnership or LLC, the taxable gain or loss flows through to the owners, avoiding the taxation at the company level.) Julie Kline works with business owners on corporate and real estate transactions, succession, and estate planning. An asset sale is the purchase of individual assets and liabilities, whereas a stock sale is the purchase of the owner’s shares of a corporation. Many clients choose to convert their C Corp to an S Corp in advance of selling their business. Thanks Anonymous for your input as well! These higher asset values will generate depreciation expense in future periods. I truly didn’t have any idea how my C Corp would hurt me when I tried to sell my business. Asset Acquisition: Transaction Costs: Expensed as incurred: Capitalized to cost of asset(s) acquired: Measurement of Acquired Assets: Generally recognized at fair value: Recognized in accordance with other applicable GAAP: Goodwill: Recognized to the extent purchase price exceeds fair value of net assets acquired: Not recognized. Our comprehensive newsletters – subscribe now for free | Worldwide We use cookies to personalise the website … After the closing, both buyer and seller maintain their own corporate existence and structure, with a shift in the owner of the operating assets. Stock acquisition The acquirer buys the target's stock of from the selling shareholders. In case of the asset purchase, the buyer purchases the specific assets and the specific liabilities of the company which it wants and there is no transfer of the business ownership, whereas, in case of the stock purchases, it is compulsory for the buyer to take all the assets and the liabilities of the seller company and there is full transfer of the business ownership. The tax implications of an M&A transaction can affect the negotiated purchase price and whether the deal will ultimately go through. Ever since he traveled to Europe for an accounting study abroad, he has sought for opportunities to taste new foods. As noted above, it might be possible to classify a stock purchase as an asset purchase for tax purposes by filing a special tax election, thereby affording the seller and the buyer the best of both worlds. Each optional tax election is described below with its corresponding requirements. Accordingly, post the acquisition’s completion the buyer will be the new owner of the acquired assets (and liabilities) and will carry on the business’s operation by using the said assets. Toggle navigation. Can I Sell My Business For Less Than I Owe the Bank? Selling A Business: Asset Acquisition vs. Stock Acquisition. Asset Purchase vs. Stock Purchase Advantages and Disadvantages. One final area of note relates to the measurement period for business combinations and asset acquisitions. Since foreign jurisdictions don’t recognize the 338(g) election, a foreign target allows the U.S. buyer to avoid recognizing the gain and to step-up the tax basis for free. In a stock purchase, the buyer purchases the entire company, including all assets and liabilities. Assume Bob’s basis in his stock is $1 million. Business Issues. The major benefit is that all asset write-ups and recognized intangibles, including goodwill, become tax deductible. Reach out to us with your questions or suggestions for future articles. I completely understand what you are facing. All the best…, Hi Jacob, Thanks for your input. Lastly, the entity type may influence how the purchase price is allocated, regardless of whether the transaction is a statutory merger or stock acquisition. Often, the predominant driving factors in deal structure are tax issues. Any purchase price … For example, the buyer may pay more to structure the deal as an asset acquisition because of certain tax benefits. Sole Proprietorship, Partnerships and LLCs Alternatively, the target may agree on a lower purchase price to structure the deal as a stock acquisition because the target receives a lower tax burden. The following example illustrates the differences between a statutory merger and a stock acquisition when the seller is a C-corporation: We will assume that Seller is a C-corporation, Bob is the owner and sole shareholder of Seller, Seller’s corporate tax rate is 21%, and Bob’s capital gains rate is 20%. Why is this distinction important to your 401(k) plan? In a cost accumulation model, the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values. The benefits of bonus depreciation from the TCJA may increase participation in M&A activities. MEASUREMENT PERIOD. Unlike the 338(g) election, foreign targets are not eligible. In an asset acquisition the underlying agreement is made between the buyer and the owner of the assets i.e. In contrast, a statutory merger results in one surviving company while the other company is legally dissolved. An asset purchase involves the purchase of the selling company’s assets — including machinery, capitalized software, facilities, vehicles, equipment, and stock or … The login page will open in a new tab. A business combination is “a transaction or other event in which an acquirer obtains control of one or more businesses” (ASC 805-10-20). Asset acquisitions are generally buyer-friendly in part because of the tax benefits the buyer receives. Thus, the election only makes sense when the present value of future tax savings (created from the deductible depreciation and amortization expenses) exceeds the current tax cost of stepping up the tax basis.9 This election is advantageous if the target has net operating losses to offset the recognized gain, or if the target is a foreign corporation. Assignments and Consents. Understanding the Key Difference Between a Stock or Asset Sale The main difference between each type of sale is with regard to what the prospective buyer is getting. Instead, the shareholders recognize gain or loss on the difference between … In a stock acquisition, the buyer acquires the target company’s stock from its stockholders. In the rare case of a bargain purchase where the fair value of the net identifiable assets is greater than the purchase price, a gain is recorded. However, because the parties can bargain over which assets will be acquired and which liabilities will be assumed, the transaction can be far more flexible An allocation will be required for financial reporting purposes if the transaction is considered a purchase. Purchasing stock is a way to almost completely get rid of the need to … Justin grew up in Lehi, Utah, and embraced being a “Pioneer” by being the only known accountant in his extended family. The seller must receive more after-tax cash from treating the acquisition as a deemed asset sale than as a stock sale to be beneficial. Buyer purchases Seller for $30 million with cash in a taxable acquisition. Depending on the agreement between the parties, the seller may also … Indemnification Provisions of a Purchase Agreement. In an asset acquisition, the buyer purchases specific assets (and sometimes certain liabilities) of the target company. After purchasing the target’s stock, the buyer gains control over the assets and liabilities of the target; however, because only ownership changes, the net assets don’t physically transfer to the buyer, they remain in the target company. The following conditions (not comprehensive) apply to the Section 338(g) election: A Section 338(g) election and Section 338(h)(10) election are quite similar. Any excess of the purchase price over the net identifiable assets acquired is recorded as goodwill. The liability issue typically will drive buyers to an asset deal; however, additional protections, including indemnity provisions, can be used in stock deals to ease the concerns of the buyer. The assets to be purchased by ABC will be XYZ’s inventory, non-inventory property (computers, delivery vehicles, etc), and … The Acquirer buys the stock of the target and takes the target as it finds it, in regard to both assets and liabilities. A stock acquisition—falling under the broader category of business combinations—occurs when the buyer acquires the target company by purchasing its stock. Sellers will generally prefer the tax treatment of a stock purchase, while buyers will prefer the transaction be taxed as an asset purchase. For example, a typical buyer acquires Company XYZ for $5M. An asset sale is the purchase of individual assets and liabilities, whereas a stock sale is the purchase of the owner’s shares of an entity. The buyer therefore acquires all of the assets, liabilities and rights of the target company. An asset purchase involves the purchase of the selling company's assets -- including facilities, vehicles, equipment, and stock or inventory. For financial accounting purposes, all assets and liabilities are stepped-up to their fair value as described above for statutory mergers, since both are considered business combinations. A portion of the purchase price may be attributed to the covenant not-to-compete and consulting agreement with Seller(s). If the transaction is structured as a statutory merger, the patent’s fair value can be amortized under IRC Section 197(a) over 15 years, just like goodwill. In an M&A transaction, certain tax elections may alter the tax impact of the transaction. This provision makes asset acquisitions (or stock sales with a Section 338(g) or Section 338(h)(10) election) more attractive to buyers because the higher basis of appreciated assets are immediately depreciated, resulting in a large tax benefit to the buyer. Asset acquisition vs. stock acquisition (fair value is different from book value) The following financial statement information is for an investor company and an investee company on January 1, 2016. A bargain purchase might occur when a seller is compelled to sell below fair value due to an economic event, company regulation, or legal order (ASC 805-30-25-3). Asset acquisition vs. stock purchase (fair value differs from book value) Assume the investor purchases the same net assets in Exercise 46., but now assume the cash purchase price is $25,200. In a stock deal, the seller will recognize gain on the sale of their stock (primarily capital gain) resulting in only one level of tax, sometimes at a lower rate. In an asset acquisition, the buyer purchases assets of the target company. If the buyer keeps that entity open and running, it is a separate but related employer (shared ownership but a separate t… These features cause the election to be a joint decision, meaning both the buyer and seller make the election. However, if the transaction is structured as a stock acquisition, the patent is not deductible, even though it is recorded under GAAP. In a stock sale, the purchaser will purchase the owner’s actual shares in the company. A few notable tax elections include a Section 338(g) election or a Section 338(h)(10) election. In a stock acquisition, the buyer acquires the stock of the target company directly from the selling owners. When Microsoft acquired LinkedIn on June 13, 2016, what Microsoft was acquiring with its cash was LinkedIn stock. In addition to the step-up in book basis for financial accounting, a statutory merger also causes the tax basis in the net assets acquired to be stepped-up to their fair market value. A stock purchase involves the purchase of the selling company's stock only. Asset deals can be more complicated depending upon the business. This provides two advantages: However, if the target is a flow-through entity, the tax rates depend on the shareholder and how the purchase price was allocated to the assets. All the best…. In an asset deal, buyers can essentially take what they want (operating assets) and leave what they don’t want (liabilities). In a business combination, the acquirer has up to one … BKD – Private Company Reporting: Accounting for Goodwill pg. On your company’s growth journey, you may experience both organic and inorganic growth. The transaction is treated as though the target’s assets are sold while the target is part of the parent’s consolidated group, so the income is recorded on the consolidated group’s tax return. In this type of purchase, only those assets and liabilities that are part of the … Home. Hi Julie, Just this afternoon, I had a conversation with one of my Attorneys about this matter. Buyers and sellers often prefer different structures due to various factors which change based on the structure and which have different impacts on the parties. A common stock purchase involves acquiring the business whole, whereas an asset purchase involves some or all of the business' assets. This patent has a fair value of $15 million and useful life of 20 years. For the purpose of this article, assume that the purchaser will be ABC. Asset Purchase The purchaser of XYZ’s assets will be either ABC or a new legal entity owned by Smith (DEF Pharmacy, Inc). The two entities retain their legal existence, but the buyer now owns the other as a subsidiary. Once the fair value is determined, generally accepted accounting principles (GAAP) requires the book basis of assets and liabilities to be stepped-up to the fair value. TWO ADVANTAGES OF A STOCK ACQUISITION are that it’s a faster and easier transaction than an asset purchase and the buyer does not experience the dilution of ownership that occurs in a merger. One disadvantage is the tax basis in acquired assets and liabilities remains unchanged, so the buyer may miss some tax benefits associated with higher depreciation and amortization … If the target company is a C-corporation, the target company’s shareholders will also be taxed when the proceeds are distributed to them. All appreciated assets the buyer purchases receive pushdown accounting and a step-up in book and tax basis, which generates higher current tax deductions. A stock sale takes place between the buyer and the target company’s shareholders. How Much Does it Cost to Sell a Business? When a statutory merger occurs and the target is a C-corporation, the target’s shareholders face two levels of taxation: one for the target’s gain or loss on the sale of net assets, and the second for capital gains recognized by shareholders when the target is subsequently liquidated. That said, there still will likely be certain required consents to the transaction. In a statutory merger, Seller liquidates after being acquired, causing two levels of tax. Per the proxy, at deal closing, each LinkedIn shareholder was set t… If your purchas… The Advantages of an Asset Purchase The table below illustrates this example: As shown above, Buyer benefits from an asset acquisition by receiving a $1 million tax deduction in 2019 because the basis in the patent was stepped-up to the fair market value. The buyer and seller must independently report to the IRS the purchase price allocations used, and the IRS may inspect the reported forms to see if the buyer and seller used different allocations.5 Each party has a vested interest in how the purchase price is allocated to the assets since different allocations can result in different tax benefits to either party.6 Buyers prefer allocating the purchase price to assets with shorter depreciation periods and/or to assets that qualify for immediate bonus depreciation (e.g., equipment that depreciates over 7 years instead of intangible assets that amortize over 15 years). So you’ve decided to sell your business, but what structure is right for the transaction?’. The buyer in a stock deal will receive a stepped-up basis in the stock of the target company equal to the purchase price, but generally, the buyer would prefer the step up to be in basis of the assets to allow for more depreciation. In an asset acquisition, both the initial and subsequent amounts are reflected as an adjustment to the cost basis of the assets acquired. The seller bears the tax burden from the gain on deemed sale. Before the TCJA went into effect, corporate tax rates were much higher than 21% and consequently, the effects of double taxation for C-corporations were much larger. Any excess of the purchase price over the net identifiable assets acquired is recorded as goodwill. Bonus depreciation is a tax election that allows qualifying property to be depreciated immediately for tax purposes. An asset purchase of a business is one of three ways to structure a company's acquisition. Internal. The advantage of a stock acquisition is the speed and relative simplicity of the transaction, and the fact that otherwise hard-to-purchase assets will easily fall under the buyer’s control. Under an asset sale, you purchase the seller’s assets and liabilities, but the seller retains possession of the legal entity. Accordingly, these considerations must be weighed against the desires of the parties, requiring creativity and planning, so that buyer and seller can reach a mutually beneficial result. Both approaches conceptually get you to the same place, but certain legal, tax and accounting issues make this decision important. In accordance with ASC 805, the buyer and seller must allocate the purchase price of the transaction to the acquired assets and liabilities at fair value (ASC 805-20-30-1). One downside of this structure is the buyer’s inability to acquire only desired assets and liabilities; acquiring all known and unknown liabilities may prove costly if the liabilities include contract claims, product liability claims, or employee lawsuits, for example. Generally there are three (3) categories of factors that drive the eventual structure of a deal: (1) business issues, (2) assignments and consents, and (3) tax issues. The stock sale is ignored, and the subsidiary is treated as if it sold its assets. The Difference Between an Asset Purchase and a Stock Purchase. Thanks. A Section 338(g) election allows a stock acquisition to be treated like an asset acquisition for tax purposes. Arbitrary amounts assigned these two … © 2010-2021 Exit Promise LP  All Rights Reserved. Assignments and Consents. For example, Salesforce acquired Tableau in 2019 for 15.7 billion in an all-stock transaction, in which Tableau stock was exchanged for Salesforce stock. Deutsch | English. With an asset purchase, the buyer can step up the tax basis on the target corporation’s appreciated assets to reflect the purchase price. Under a stock sale, you purchase the seller’s stock - thereby taking possession of the seller's legal entity (in addition to their assets and liabilities). Thus, the costly and complex process of valuing all identifiable assets and liabilities of the target is required for either method. If a $10 million sales price is agreed upon by both parties, what should it … In our simple example, the tax implications of Buyer and Seller are quite clear; however, the tax effects depend on many factors, including the entity type of the seller, the type of assets in the transaction, tax elections made during the acquisition, tax deferral techniques, and type of consideration received. Contrastingly, in a stock acquisition, Bob only has one level of taxation. As mentioned in the overview, all examples below will assume the buyer purchases the target with cash in a taxable acquisition. Buyers often prefer asset acquisitions because they will get the cost basis (based on purchase price) for the acquired assets, allowing them the benefit of depreciating the assets at a stepped-up basis. For example, when details … In a stock acquisition, although one of the entities owns the other, the two entities generally retain their separate legal existence. This article touches on some of the major considerations to be aware of when structuring your deal, including entity type, voluntary elections, and TCJA impacts for both asset and stock acquisitions. However, in recent years this strategy takes five years to fully benefit as the business owner. Inorganic growth through acquisitions can present opportunities to quickly enter a market, overcome steep learning curves, or achieve larger scale. Acquiring a company via a stock purchase means that the buyer is purchasing the ownership of the entity from the seller. For tax purposes in a statutory merger, the buyer amortizes any purchased goodwill on a straight-line basis over 15 years.2 In contrast, no tax deduction is allowed for goodwill in stock acquisitions, so taxable asset acquisitions are, in this sense, buyer friendly. The advantage of a stock acquisition is the speed and relative simplicity of the transaction, and the fact that otherwise hard-to-purchase assets will easily fall under the buyer’s control. This article only addresses acquisitions that qualify as business combinations under the Accounting Standards Codification (ASC) 805. She plays a general counsel role (a “quarterback,” as she says) on transactions and counsels clients on issues like business transition and succession planning, and estate planning. The purchased company remains intact through the transaction but has a new owner(s). The first tax is for Seller’s gain on the sale of its assets (assume Seller’s basis in the net assets is 10 million). Typically a stock deal will involve much less complexity as you do not have to move the entire business into a new entity. An asset acquisition is accounted for in accordance with the “Acquisition of Assets Rather Than a Business” subsections of ASC 805-50 by using a cost accumulation model. The tax impacts are highlighted below: If Seller was instead taxed as either an S-corporation or a partnership (with various legal forms), Seller would not experience double taxation in a statutory merger. ... diligence to check for environmental issues if making a plan to purchase a company's real estate holding as part of the asset purchase. Therefore, in most instances, it’s just basically an easier, less complex transaction. Once an asset purchase is complete, the assets and liabilities that have been purchased are moved to the new entity and the old entity (and any assets or liabilities it still owns) must be wound down. In a stock deal, the original basis is simply inherited, leaving less depreciation deductions for the Buyer over time. 4, Structuring Business Assets Purchases with Taxes in Mind, Asset Allocation for Business Purchases – A Quick Primer for Buyers and Sellers, IRS Cost Segregation Audit Technique Guide – Chapter 6.8 – Bonus Depreciation Considerations, All known and unknown assets and liabilities, Complete ownership and control of the Target firm, Target must liquidate, thus ceasing to exist, Target remains a separate entity in parent-subsidiary relationship, GAAP Allocation of Purchase Price for Net Assets/Liabilities Acquired, Required, which can be costly and complex, Amortized straight-line over 15 years for public and private companies, Stepped-up to fair market value of the asset or liability, Stays the same since target remains a separate entity, Creates temporary book-tax difference leading to a deferred tax asset/liability, Creates permanent book-tax difference leading to a rate reconciliation item, The buyer unilaterally makes the election, The buyer bears the tax burden from the gain on the deemed sale of target’s assets, The target must be 1) a U.S. subsidiary of an affiliate group of corporations or consolidated group, or 2) an S-corporation, Both the buyer and seller jointly agree to make the election. 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