... diligence to check for environmental issues if making a plan to purchase a company's real estate holding as part of the asset purchase. Justin grew up in Lehi, Utah, and embraced being a “Pioneer” by being the only known accountant in his extended family. Unlike the 338(g) election, foreign targets are not eligible. For the acquisition of a company in crisis the asset deal is preferable because the liabilities are only passed on to the purchaser to a limited extent. This bonus depreciation does not apply to intangibles acquired, which follow the 197(a) amortization rules illustrated in the patent example above.10. Hi Julie, Just this afternoon, I had a conversation with one of my Attorneys about this matter. A stock acquisition—falling under the broader category of business combinations—occurs when the buyer acquires the target company by purchasing its stock. This article addresses specific issues companies face in taxable statutory mergers and stock acquisitions that meet the definition of a business combination for financial accounting purposes. Sole Proprietorship, Partnerships and LLCs Sellers will generally prefer the tax treatment of a stock purchase, while buyers will prefer the transaction be taxed as an asset purchase. Ever since he traveled to Europe for an accounting study abroad, he has sought for opportunities to taste new foods. © 2010-2021 Exit Promise LP  All Rights Reserved. So you’ve decided to sell your business, but what structure is right for the transaction?’. Instead, the tax would flow through the company directly to Bob’s individual tax return. A Section 338(g) election allows a stock acquisition to be treated like an asset acquisition for tax purposes. In addition to the structure of the transaction, the target’s entity type also has important tax implications for the acquisition. We will assume throughout the article that the acquirer is purchasing 100% of the target firm through a lump-sum cash purchase for simplicity. Each optional tax election is described below with its corresponding requirements. Smith has 2 options: asset purchase or stock purchase. 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. Any excess of the purchase price over the net identifiable assets acquired is recorded as goodwill. 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. An asset acquisition is the purchase of a company by buying its assets instead of its stock. For these tax reasons, stock acquisitions are generally considered more seller-friendly and statutory mergers taxed as asset acquisitions are more buyer-friendly. In contrast, a statutory merger results in one surviving company while the other company is legally dissolved. 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. The two entities retain their legal existence, but the buyer now owns the other as a subsidiary. In a stock sale, the purchaser will purchase the owner’s actual shares in the company. These features cause the election to be a joint decision, meaning both the buyer and seller make the election. Can I Sell My Business For Less Than I Owe the Bank? The purchase price will be allocated among all of the underlying assets of the LLC. If the target company is a C-corporation, the target company’s shareholders will also be taxed when the proceeds are distributed to them. Summary: A merger means that two companies are literally combined into a single company. Inorganic growth through acquisitions can present opportunities to quickly enter a market, overcome steep learning curves, or achieve larger scale. This may apply when a parent company is selling a subsidiary’s stock. 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. In an M&A transaction, certain tax elections may alter the tax impact of the transaction. The purchase price is entirely negotiable, and how you structure the deal will likely drive the purchase price up or down. 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. This article goes over the pros / cons of each & how to decide which one is right for you. 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 … For example, when details … In an asset acquisition, both the initial and subsequent amounts are reflected as an adjustment to the cost basis of the assets acquired. 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 … Lastly, the entity type may influence how the purchase price is allocated, regardless of whether the transaction is a statutory merger or stock acquisition. When deciding to buy or acquire a business, the purchaser must decide if the deal will be to purchase the assets of the business, or the stock. For example, a typical buyer acquires Company XYZ for $5M. This can be done through peaceful negotiations with management or through a hostile takeover. 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. Assume the purchase price equals the fair market value of the identifiable assets of the target. This step-up for appreciated assets leads to higher initial tax depreciation and amortization expenses.1 These higher expenses generally lead to lower net income in post-acquisition periods and lower taxable income. 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. As mentioned in the overview, all examples below will assume the buyer purchases the target with cash in a taxable acquisition. A few notable tax elections include a Section 338(g) election or a Section 338(h)(10) election. The Difference Between an Asset Purchase and a Stock Purchase. Business Issues. Salesforce and Tableau still operate as separate legal entities, but in a parent-subsidiary relationship. In a stock acquisition, only the shareholders of a C-corporation recognize any gain. Toggle navigation. The buyer therefore acquires all of the assets, liabilities and rights of the target company. 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 sum of Company XYZ’s identifiable assets is $3M, so the buyer allocates $2M to goodwill. In a stock acquisition, although one of the entities owns the other, the two entities generally retain their separate legal existence. Selecting the best structure when selling or buying a business is often critical to the success of the deal itself and it will often have lasting impact on the future of the business. However, this figure varies significantly by company size, with larger … In a stock acquisition, the buyer acquires the stock of the target company directly from the selling owners. Julie Kline works with business owners on corporate and real estate transactions, succession, and estate planning. For a more general overview of merger and acquisition (M&A) transactions, see M&A Buy Side vs. Sell Side or Acquisition Decision Making. Section 1060 of the Internal Revenue Code provides guidelines for the order in which the purchase price should be allocated to the assets in the transaction. 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. In a stock acquisition, the buyer acquires the target company’s stock from its stockholders. If your purchas… Depending on the agreement between the parties, the seller may also … 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. Any purchase price … Stock acquisition The acquirer buys the target's stock of from the selling shareholders. With an asset purchase, the buyer can step up the tax basis on the target corporation’s appreciated assets to reflect the purchase price. Thus, the election must be mutually beneficial to occur. The result: In an asset acquisition, ... there may be confusion in the marketplace and potential stock price volatility. Arbitrary amounts assigned these two … Therefore, in most instances, it’s just basically an easier, less complex transaction. 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 these statutory mergers, Bank of America and JPMorgan Chase each emerged as the sole surviving firm. How It Works; Our Lawyers. Determining the fair value of each acquired asset (or liability) can be a very expensive and complex process. 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. From Amazon’s acquisition of Whole Foods to CVS’s acquisition of Aetna, acquisitions happen frequently in capital markets. An asset purchase of a business is one of three ways to structure a company's acquisition. Reach out to us with your questions or suggestions for future articles. That said, there still will likely be certain required consents to the transaction. Afternoon, I had a conversation with one of my Attorneys about this matter proxy... / cons of each acquired asset ( or liability ) can be problematic when selling a subsidiary ’ assets! 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