Merger & Acquisition Insights

What’s Better — Asset Purchase or Stock Purchase?

Posted on January 22, 2019 by Spencer Tenney

“I have already discussed the sale of my business with my accountant and we have determined that this must be a stock deal – otherwise it doesn’t make sense for me to sell.” Transportation business owners convey some version of this statement to the Tenney Group all the time. Before you get tunnel vision on one path to the closing table, consider the following facts.

1.) You alone don’t get to decide whether the transaction will be a stock or asset purchase.

He who holds the cash holds the key to whether this is a stock or an asset purchase. Buyers have goals just like you do. They also have real concerns about risks and the amount of exposure they are willing to take on as part of purchasing your business. Transportation is an asset heavy industry. In some cases, your best buyers can only justify doing the deal if they receive the tax benefits of depreciating the assets (through the asset purchase) and if they can eliminate potential hidden exposure by “not purchasing the stock.”

2.) A stock purchase is not necessarily better than an asset purchase.

We have a refrigerated trucking client we are advising right now who is considering two offers on the table. One is an asset purchase and one is a stock purchase. The offers are about $2.5M apart in total consideration (the asset purchase being the higher of the two). However, the net proceeds from each offer is basically the same. I share this to illustrate that the concept of “better” is irrelevant. The net proceeds of a potential offer should be the primary focus for a seller. Conceptually, if all things are the same, the stock purchase should net more proceeds to the seller. However, what accountants often fail to tell their clients is that sellers typically receive either the favorable purchase price (through an asset purchase) or the favorable tax treatment (through a stock purchase) – not both.

3.) Requiring a particular type of purchase shrinks your pool of potential buyers.

Getting a deal done is difficult. It requires careful consideration of a variety of factors to get both the buyer’s goals and seller’s goals in alignment. Leading with a “my way or the highway” approach sends the wrong message to buyers. If a buyer believes your approach to deal making is unreasonable, he may also find the value you have placed on your business unreasonable as well. Less buyers equals less offers. Less offers equals less leverage for the seller. Less leverage equals less options. Less options equals less money to the seller…you get the point.

4.) Staying open-minded and allowing your transaction advisors to create options for you is the surest path to completing your transaction goals.

We recently closed the sale of a $25M transportation company. During the transaction process, we raised the total consideration of the buyer’s first offer by 66%. Then our transaction tax specialist saved our client an additional $2.4M through capitalizing on opportunities his accountant had missed. When we began this assignment, the client was very clear about his financial objectives for a transaction.  Though the client had one of the highest performing businesses we have advised in years, he had no ego.  He allowed his trusted advisors to work their process to help him achieve his goals. The path to get to those goals was not a concern to him. This industry is not like other industries. Surround yourself with proven advisors that understand this industry and let them do what you have hired them to do. In doing so, you won’t have to answer the question of stock vs. asset purchase because it won’t matter.

Overall, a precondition to one type of sale can seriously jeopardize the success you might reap from the sale. As stated above, you alone don’t get to decide what type of sale it will ultimately be – and if you strive to do so, you shrink your pool of potential buyers. The best course of action that can be undertaken is educating yourself on both types of sales, so that when it comes time when both options are on the table, you and your transaction advisors can engage in a healthy dialogue and secure a viable outcome for you and your business.

Tags: Selling a Business

Category: Articles