There are different ways of buying and selling a company. Depending on how it is done, the procedures will be different and, as with everything, there are always advantages and disadvantages, so it is necessary to have very clear objectives in order to choose the most convenient option.
In this article we will talk about two ways: the share deal and the asset deal.
What is an Asset Deal or Share Deal in Company Acquisitions?
In principle, a company can be acquired or sold either by acquiring or selling the entire assets individually or by the buyer acquiring all shares in the company. The latter is called a share deal.
The so-called share deal is possible for all companies in which the share capital has been issued to the shareholders in the form of share certificates, e.g. for all corporations (public limited companies, limited liability companies, etc.)
If only individual assets of the company are purchased, it is an asset deal. Since in an asset deal the individual assets are acquired directly, it can be carried out for any type of company.
Assets can be both tangible and intangible. The former could be buildings, equipment or machinery, for example. The latter could be patents or customer databases.
Whether the asset deal or the share deal is advantageous depends on many different factors.
Share Deal vs. Asset Deal (Stock sale vs. Asset sale)
Usually, the buyer prefers an asset deal to avoid tax. Especially if the company has substantial hidden reserves in depreciable fixed assets, the asset deal offers great advantages. This allows a correspondingly high depreciation potential to be created.
For example, if a company is bought with a number of very old real estate assets in need of renovation. This leads to a lowering of the initial price.
A buyer can also decide which assets to keep and which not to keep in order to minimize risks, which cannot be done in the share deal.
The assets are valued at the purchase price and thus depreciated from the new, higher value.
A Share Deal, as the name suggests, centers on the acquisition of all shares in a company. This method is typically applicable to companies where share capital is represented through share certificates, such as public limited companies, limited liability companies, and various partnerships.
As a rule, the seller wants to carry out a share deal. This is due to the fact that the taxation of profits from the sale of shares in the corporation held as private assets, such as shares in a joint-stock company or a limited liability company, is taxed at a preferential rate which results in about 1,5% if the shareholder is a limited liability company.
If the seller wants to dispose of a company completely, the share deal is the simplest option.
It is also the easiest option if the parties involved want the deal to be as confidential as possible. Because of the bureaucracy required for the asset deal, it is easier for there to be a leak of information by one of the parties involved.
In a company purchase, the buyer typically assumes all tax liabilities. Therefore, it is advisable to conduct a comprehensive due diligence, which involves a careful examination of various aspects, especially with regard to tax considerations.
The following facts, among others, are examined within the framework of tax due diligence:
- Proper accounting of operating expenses and capitalizable acquisition and production costs.
- Assessment of impairment losses reversals.
- Evaluation of accrual amounts.
- Examination of relationships with related parties and their adherence to arm’s length principles.
Of course, the choice of one or the other will depend on the specific circumstances of each case. Buyers must do their homework, to know whether what sellers demand is a good option, or whether they should look for an alternative that suits them better.