A brief discussion on items to consider when contemplating the sale of equity vs. the sale of assets.
Outlined below are descriptions of both equity and asset transactions. Additionally, I have included a laundry list of the various advantages and disadvantages of each. There are many ways to structure a transaction and the structural decision should include considerations in addition to those mentioned here. My goal is to simply provide an overview of two common transaction types, along with some of the benefits and drawbacks of each.
Equity Transaction: An equity transaction involves one or more buyers purchasing some or all of the equity of a target company from the target company's equityholders. In return, the equityholders of the target company receive cash, stock, or another form of consideration.
Advantages of an Equity Transaction:
- No transfer of assets or liabilities occurs because the owner of those assets and liabilities (the company) remains constant.
- Lesser likelihood of confusion as to what assets or liabilities will be held by the company following the transaction, as no transfers occurred, all of the assets will remain in place and with the company.
- Contracts or agreements that may be difficult to assign or transfer to a new entity are able to remain in place because the company remains unchanged and intact. Note, any "change of control" provisions in contracts or agreements should be carefully reviewed, as these may be impacted.
- Quick and simple way for a buyer to takeover a company in its entirety.
- Allows for a clean and complete exit from a company, ensuring that all assets and liabilities remain with the company.
Disadvantages of and Equity Transaction:
- Absent additional agreements, the buyer is unable to select the specific assets it wants to purchase and/or liabilities it wants to assume.
- The buyer does not receive a "step-up" tax benefit in the assets it now owns.
- State and federal securities laws must be considered and complied with when purchasing and selling equity.
- If the company has numerous equityholders, negotiations can be difficult and cumbersome.
Asset Transaction: An asset transaction involves one or more buyers purchasing some or all of the assets (and potentially certain liabilities) of a target company. In return, the target company receives cash, stock, or another form of consideration.
Advantages of an Asset Transaction:
- No change in the ownership in the company.
- The buyer receives a "step-up" in basis in the assets it purchases.
- Flexibility as to what assets and liabilities are going to be purchased by the buyer or retained by the seller.
- A limited asset sale may not require the same level of approval as required in an equity transaction.
Disadvantages of an Asset Transaction:
- All purchased assets and assumed liabilities must be transferred to the buyer. If any transfers require third-party consent, this can slow down transaction speed and operational synergies.
- If a company does not carefully plan for operations following the sale of significant assets, maintaining continuity in business operations following the transaction can be difficult.
- It does not completely liquidate or dissolve the company, therefore, the target company may still need to liquidate additional assets that were not purchased and/or extinguish liabilities that were not assumed by the buyer.