What happens to your company’s liabilities when you sell it? How can the structure of a business sale impact both buyers and sellers?
In their book Venture Deals, Brad Feld and Jason Mendelson discuss asset deals vs. stock deals in company acquisitions. Their insights help business owners understand the advantages and potential pitfalls of each approach, from liability transfers to tax implications.
Whether you’re considering selling your company or looking to acquire one, understanding these deal structures could save you from costly mistakes down the road.
Asset Deal vs. Stock Deal
Feld and Mendelson outline two main types of acquisitions. Below, we’ll explain asset deals vs. stock deals, as well as the respective implications for both buyers and sellers.
Asset Deals
The authors note that, in an asset deal, the buyer purchases specific assets and liabilities from the target company rather than acquiring the company itself. This method allows the buyer to choose precisely which components of the business they want to take on, such as equipment, intellectual property, or customer contracts, along with any associated debts or obligations. Buyers often prefer this structure when they want to select only those assets and liabilities that align with their business objectives, effectively “cherry-picking” the components that offer them the most value. This approach helps a buyer avoid liabilities or non-essential assets that might come with a full company acquisition.
(Shortform note: Acquiring companies often prefer asset deals when buying distressed companies. However, buying distressed assets requires caution. Buyers need to protect themselves from risks like fraudulent transfer claims—legal challenges saying the company sold its assets for less than their fair value to avoid paying debts. If they sell assets at a price far below their worth and can’t pay their creditors, those creditors could sue, claiming the sale was a trick to cheat them out of money they’re owed.)
The authors warn that asset deals may not be such a great deal for you as the seller. This is mainly because in an asset deal, the buyer acquires only the assets of the company—not its liabilities, which you could still be responsible for. (Shortform note: On the other hand, the “cherry-picking” principle can also be an advantage for the seller in an asset deal. For example, you might opt to keep assets that provide more tax incentives or retain assets that allow you to keep running your core business.)
Stock Deals
In contrast, write the authors, the buyer acquires all outstanding shares of the target company’s stock—so a stock deal gives the buyer ownership of the entire company, including all assets, liabilities, contracts, and obligations. As the seller, you relinquish your shares in exchange for the agreed purchase amount, resulting in a complete transfer of ownership and operational control. In this scenario, you exit the company entirely. This tends to be more favorable for you as the seller, since you get to transfer all your company’s liabilities along with its assets, leaving you free from any obligations after the sale.
| Stock-for-Stock Mergers One variation of a stock deal is a stock-for-stock merger. Instead of paying cash (as is traditional in stock deals), the acquiring company uses its own shares as currency to purchase another company. This merger structure offers several advantages for acquiring companies. For one, it allows buyers to keep cash reserves intact and avoid taking on debt. As a result, the acquisition process is faster and cheaper, which could benefit both the seller and buyer. It also provides flexibility, as deals can combine stock and cash components to meet specific needs. |
