When one buys a business, they could buy assets of the business or buy stocks of the business. Buying a business either way comes with different implications and this article compass stock purchase with the asset purchase.
What is a Stock Purchase?
A stock purchase is simply a purchase of the business entity. Thus, when one buys business with a stock purchase transaction, the full ownership of the business is transferred to them. When a person buys a stock of a business, they get the business as well as its assets and liabilities.
What is an asset purchase?
Businesses own assets which could include equipment and other materials. Instead of buying stocks of a business and getting full ownership of a business, one could buy specific assets of the business. Asset purchase transactions are made based on the worth of the assets of interest as well as agreed liabilities.
Pros and Cons of Stock Purchase
A stock purchase transaction is typically a more straightforward process, especially when compared with an asset purchase transaction. A stock purchase transaction is usually more straightforward because it simply involves a transfer of ownership as opposed to an asset purchase that would also require processes such as revaluation. The straightforward nature of stock purchase transactions is a benefit of these transactions. The transfer of licenses as well as other resources which would be needed to run the business, enhancing the ease of running the business is another benefit of stock purchase transactions.
It is, however, noteworthy that the disadvantages of stock purchase include the inability to choose assets and liabilities which one prefers. The assets are also transferred at their carrying value which may be higher than their current value. A stock transfer could thus involve higher financial implications, and this is a disadvantage of these transactions. The issues that could arise from securities transfer could also make the stock transfer more complicated, discouraging the process. Stock purchase transactions could also come with a tax disadvantage.
Pros and Cons of the Asset purchase
A major pro of asset purchase is the freedom to decide the assets which one wants to buy as opposed to getting all assets and liabilities except an alternative agreement is reached. With an asset purchase transaction also comes tax benefits since the tax could be reduced because of the lowered value of the assets.
With an asset purchase transaction also comes limited liability because all liabilities assumed are pre-negotiated. Thus, projections can be properly made without expecting surprises from unknown liabilities. Asset purchase transactions also have the extra benefit of bypassing issues that may arise with shareholders since shareholders are expected to accept the terms and conditions of the buy. Buyers also get to choose employees they want to retain when the buy the organization in the form of asset purchase.
Because the buyer does not inherit agreements, resources and even leases, the new negotiations needed for running the organization is a major con of asset purchase transactions. Buyers also needed to retitle assets as well as liquidate certain assets and responsibilities. Asset purchases are also bound to cost more.