While purchasing or selling a business, the investor or business person (Here, Jimmy) have to make a decision: the transaction can be either by the way of acquisition of assets or by the way of purchase of common stock.
ADVANTAGES OF ASSET PURCHASE:
1. Various tax advantages including tax benafit on depreciation.
2. Cost and other resources required for conducting due diligence can be avoided.
3. The buyer has the power to decide which assets/liability he have to purchase and which doesn’t want to.
DISADVANTAGES OF ASSET PURCHASE:
1. The tax payable for the seller is generally higher, so the seller may demand a higher purchase price.
2. Since not all the assets/liabilities are acquired by the buyer, the seller still might be needed to sell any assets not purchased buy buyer, pay off any liabilities that have not been accepted.
3. Re-titling and revaluation of assets might be required.
ADVANTAGES OF STOCK PURCHASE:
1. Generally, more simple than an asset acquisition.
2. Transfer taxes could be exempted in the hand of buyer.
3. No issue regarding re-titling or revaluation of assets.
DISADVANTAGES OF STOCK PURCHASE:
1. No option to get rid of unwanted liability other than by entering into a separate agreement.
2. Assets and liabilities transfer at carrying value only.
3. All securities/stock laws time being in force have to be considered, which can be a complicated process.
Jimmy owns a major incorporated (C corporation) sporting goods store, ActiveNow. He is considering expanding into...