When business owners are considering an M&A transaction, one of the first things they need to consider is transaction structure: a share deal vs. asset deal.
Both have their own advantages and disadvantages, and it’s important to understand the differences between them in order to make the best decision for your particular situation.
In this blog post, we’ll explore the key differences between share and asset deals and help you understand which option may make sense for you. As always, before moving forward, be sure you consult with your M&A advisors.
Let’s dive in.
What is the difference between an asset deal and a share deal?
In a share deal, the acquiring company purchases the shares of the company being acquired, resulting in the latter becoming a subsidiary of the former and its shareholders becoming shareholders of the acquiring company.
In an asset deal, the buyer acquires specific assets and liabilities of the company being acquired, while the latter remains a separate legal entity.
One major difference between these two types of deals are the tax implications. In a share deal, shareholders of the company being acquired may be subject to capital gains tax on the sale of their shares. In an asset deal, the company being acquired may be subject to tax on the sale of its assets.
Another difference is the liability assumed by the acquiring company. In a share deal, the acquiring company takes on all of the liabilities of the company being acquired, including any legal or financial obligations. In an asset deal, the acquiring company only assumes the specific liabilities it has agreed to purchase.
Stock sales tend to be simpler and more straightforward, as they involve the transfer of shares rather than individual assets and liabilities.
On the other hand, asset sales can be more flexible, as the acquiring company can choose certain assets (both tangible or intangible assets) and liabilities to purchase, rather than purchasing the entire business.
Asset Deal Example
Company A is a manufacturing company that is interested in expanding its operations. Company B is a supplier of raw materials that Company A uses in its manufacturing process. Company A decides to acquire Company B in an asset deal, in which it will purchase specific assets and liabilities of Company B.
In this deal, Company A may decide to purchase certain machinery and equipment from Company B, as well as certain customer contracts and intellectual property. Company B’s management team and employees may remain in place, and Company B will continue to operate as a separate legal entity.
Company A will use a combination of its own funds and the assets it has purchased from Company B as collateral to secure financing for the transaction. The acquisition will allow Company A to expand its operations and improve its supply chain, while Company B will receive a financial payout for the assets it has sold.
Share Deal Example
Company C is a technology company that is interested in acquiring a smaller software company, Company D. Company C decides to purchase the shares of Company D in a share deal.
In this deal, Company C will use its own funds and external financing to purchase the shares of Company D. Once the deal is completed, Company D will become a subsidiary of Company C, and the shareholders of Company D will become shareholders in Company C.
Company D’s management team and employees may be retained by Company C or replaced, depending on the terms of the deal. The acquisition will allow Company C to expand its product offerings and gain access to new technology, while the shareholders of Company D will receive a financial payout for the sale of their shares.
Share Deal vs. Asset Deal Tax Implications
As I mentioned above, one of the main differences between share deals and asset deals are the tax implications. In a share deal, the acquired company’s shareholders may be subject to capital gains tax on the sale of their shares. In an asset deal, the company being acquired may be subject to tax on the sale of its assets.
In a share deal, the tax implications for the target company’s shareholders will depend on the tax laws of the country where the company is based and the individual tax circumstances of the shareholders. In general, capital gains tax is applied to the profit made from the sale of a capital asset, such as shares in a company. The tax rate may vary depending on the length of time the shares were held and other factors.
In an asset deal, the tax implications for the acquired company will depend on the specific assets and liabilities being sold and the tax laws of the country where the company is based. The acquired company may be subject to tax on the sale of its assets, such as property, equipment, or intellectual property. The tax rate may vary depending on the type of asset being sold and other factors.
Quick reminder to seek the advice of a qualified tax advisor when considering an M&A transaction in order to understand the potential tax implications for your company and its shareholders.
Share Deals vs. Asset Deals: 10 Factors to Consider
So, which type of deal is right for you?
Beyond the tax implications we covered above, here are 10 things to think about when deciding between a share deal and an asset deal:
1. Liability Risks
In a share deal, the acquiring company assumes all of the target company’s liabilities, including any legal or financial obligations.
In an asset deal, the acquiring company only assumes the specific liabilities it has agreed to purchase.
2. Continuity
In a share deal, the acquired company becomes a subsidiary of the acquiring company, so there is often more continuity for the acquired company’s employees, customers, and suppliers.
In an asset deal, the acquired company remains a separate legal entity, but it may be affected by the loss of specific assets and liabilities.
3. Management
In a share deal, the acquired company’s management team may be retained by the acquiring company or replaced.
In an asset deal, the acquired company’s management team generally remains in place.
4. Integration
In a share deal, the target company is fully integrated into the acquiring company, which can streamline operations and decision-making.
In an asset deal, the target company remains a separate entity, which can make integration more challenging.
5. Control
In a share deal, the acquiring company has full control over the target.
In an asset deal, the acquired company’s management team generally retains control over the company’s operations.
6. Funding
In a share deal, the acquiring company typically uses its own funds or external financing to purchase the shares of the selling company.
In an asset deal, the acquiring company may use a combination of its own funds and the target’s assets as collateral to secure financing.
7. Timing
Share deals can be quicker to complete, as they involve the transfer of shares rather than the transfer of individual assets and liabilities.
8. Due diligence
Both share deals and asset deals require thorough due diligence to ensure that the acquiring company is aware of all relevant information about the acquired company.
On the flipside, asset deals may require more extensive due diligence, as the acquiring company needs to assess the value and condition of specific assets and liabilities.
9. Valuation and Purchase Price
The valuation of the target company can be more straightforward in a share scenario, as the acquiring company is purchasing the entire company.
In an asset deal, the value of the target company’s assets and liabilities must be individually assessed.
10. Complexity
Share deals tend to be simpler and more straightforward, as they involve the transfer of shares rather than the transfer of individual assets and liabilities.
On the flipside, asset deals can be more flexible, as the acquiring company can choose which assets and liabilities to purchase, rather than purchasing the entire company.
Which is better a stock sale or an asset sale?
There is no clear cut answer as to which type of company acquisition is better. Whether it’s best to go with a share deal or asset deal depends on your specific situation.
As we wrap up, here’s a quick summary with the pros and cons for each.
Pros of Share Deals:
- Simplicity: Share deals tend to be simpler and more straightforward than asset deals, as they involve the transfer of shares rather than the transfer of individual assets and liabilities.
- Continuity: In a share deal, the target company becomes a subsidiary of the acquiring company, which can provide more continuity for the target company’s employees, customers, and suppliers.
- Integration: In a share deal, the target company is fully integrated into the acquiring company, which can streamline operations and decision-making.
- Valuation: The valuation of the target company can be more straightforward in a share deal, as the acquiring company is purchasing the entire company.
Cons of Share Deals:
- Tax implications: The target company’s shareholders may be subject to capital gains tax on the sale of their shares.
- Liability: The acquiring company assumes all of the target company’s liabilities, including any legal or financial obligations.
- Management: The target company’s management team may be retained by the acquiring company or replaced.
Pros of Asset Deals:
- Customization: Asset deals can be more flexible, as the acquiring company can choose which assets and liabilities to purchase, rather than purchasing the entire company.
- Liability: In an asset deal, the acquiring company only assumes the specific liabilities it has agreed to purchase.
- Management: In an asset deal, the target company’s management team generally remains in place.
- Price: Asset deals may be less expensive for the buyer, as they only pay for the specific assets and liabilities being acquired rather than the value of the entire company.
Cons of Asset Deals:
- Complexity: Asset deals can be more complex than share deals, as they involve the transfer of individual assets and liabilities.
- Valuation: The value of the target company’s assets and liabilities must be individually assessed in an asset deal.
- Continuity: In an asset deal, the target company remains a separate legal entity, but it may be affected by the loss of specific assets and liabilities.
- Tax implications: The target company may be subject to tax on the sale of its assets.
Keep in mind that share deals and asset deals have their own legal considerations and can be complex transactions.
It is important to seek the advice of a qualified lawyer who has experience with M&A transactions in order to ensure the deal structure is optimized for your company.
Hopefully this post helped you, regardless if you are buying or selling a business. Feel free to drop me a note in the comments below if you have any questions.
