Benefits of Stock Purchase vs Asset Purchase

Erik Mills

2 min read

#Data Room News Update: Jun 16, 2021

Business and risk always go hand-in-hand, especially when buying a company. 

In this article, we will explain what a stock purchase is, what an asset purchase is, and what is the difference between the two. Also, we will help you to choose the most suitable type of purchase and overview the main benefits of using a data room for it.

What is a stock purchase?

Shareholders purchase shares of stock, which represent a percentage of ownership in a company. In a stock purchase, the acquirer buys the whole company — assets and obligations.

Buyers earn money by receiving quarterly dividends if purchasing the shares of a value company and hope to profit by selling their shares after their price rises.

Investors can often choose between purchasing common stock and preferred stock. Common stock is ordinary stock — what comes to the minds of most people when thinking of the financial markets. Preferred stock shareholders realize extra benefits, such as receiving quarterly dividends or money from asset liquidation before common stockholders.

What is an asset purchase

Asset Purchase Agreement (APA) is a document between a buyer and a seller which delineates the transfer of property and/or intangible assets.

According to International Financial Reporting Standards (IFRS), assets include such categories as:

• Goodwill
• Stock Acquisitions Asset
• Plant and machinery
• Contracts
• Know-how
• Premises

Stock purchase vs. asset purchase

It is vital to understand the pros and cons of asset and stock purchases to choose what’s best for your situation.

Asset purchase advantages:

• Amortization of tax deductions 
• Tax-purposed amortized goodwill
• The possibility of impact on the liabilities portfolio 
• Less expensive due diligence

Asset purchase disadvantages:

• All the previous contracts should be revised
• On the one hand, high taxes for the seller and higher price for the buyer on the other hand
• It is necessary to renegotiate the key employee’s agreements
• The seller must still liquidate any non-purchased assets, pay any liabilities that have not been taken over, and take care of any leases that need to be rescinded

Stock purchase advantages:

• The buyer need not worry about costly re-evaluations and re-registration of individual assets
• Buyers can avoid paying the transfer tax
• Hedge funds commonly conduct mergers and acquisitions by purchasing a controlling percentage of outstanding shares
• Buyers may generally accept licenses and licenses that are not transferable without specific consent
• Easier and more common than the acquisition of assets

Stock purchase disadvantages:

• No “step-up” tax benefits
• Taking over liabilities, which is hard to avoid
• Delaying the process by other main shareholders who don’t want to lose their part of share

How to choose the most suitable type of purchase

Analyze your long-term and short-term business goals. Keep in mind your current resources: are you financially stable enough to assume liabilities or take care of employees? 

Here are some tips to be aware of before making a decision:

• Stock could be bought with the help of an online broker
• Research before buying
• Make a portfolio
• Clarify what is included in the transfer of assets purchase
• Keep all your contracts and documents in a safe space like a virtual data room

Benefits of a virtual data room

Both a stock acquisition and an asset acquisition are long-term processes. Buyers and sellers need the help of financial analysts, and tax and legal experts. To direct the work of a large team and operate with a large amount of data, you will need a functional online space. Today, virtual data rooms are the most secure tool for handling these amounts of data.

Data room benefits:

• Safe deal for M&A transactions. Most virtual data rooms comply with legal, medical, and financial security standards. Look for a deal room with 2-factor authentication.
• Large storage capacity for documents. Providers offer varied tiered plans based on storage needs. 
• Ability of sending, editing, and deleting documents. Documents can be downloaded in different file formats, remotely shredded, viewed in the fence, automatically enumerated, and signed with a customized watermark.
• Due diligence, selling, and other steps could be performed in a virtual data room. Give access to your team and enjoy a smooth and coordinated work process.