Should I buy the whole company or just it’s assets?
While this sounds like a simple question to answer, it is truly not. Let’s look at the different arguments. But please keep in mind that this tax, nor legal, nor investment advice (read my disclaimer). It’s rather meant for you to learn about the differences.
tl;dr: it really depends on the tax and entrepreneurial basis as to which option makes more sense.
Come on, you can be more specific than that? Ok, let’s try.
What is an asset deal first of all?
In an asset deal you just buy the respective assets (e.g. the domain, customer database, website) from the seller, but not the entire company those assets are in.
Advantage of an asset deal:
You can clearly look at each asset beforehand and have a good understanding of any obligations. The seller remains liable for the obligations of the company (but both are liable for the tax).
This type of deal makes sense if you worry that the website or digital asset you want to buy is embedded into a company in which you have no full insights, worry that they are at risk of becoming insolvent, etc. You really only take over the assets.
Disadvantages of an asset deal:
- Complex contractual arrangements are required: each asset has to be clearly defined. General clauses are not sufficient (e.g. all assets are being transferred).
- Intangible assets (e.g. trademarks) are hard to value (which has tax implications).
- If a contract with 3rd parties is in place, each partner needs to approve the transfer on to you, the buyer. I am not a lawyer, but I could imagine that, for example, newsletter subscribers (which gave an opt-in to the company of the seller) theoretically would need to be replaced/refreshed, too.
What is a share deal?
In a share deal, you not only buy the assets but the entire corporation, which owns those assets.
Advantage of a share deal:
- The contract is very lean. However, you need to ensure that you have special liability regulations put in place to ensure that the seller does not shift eventually hidden liabilities on to you, the purchaser.
Disadvantages of a share deal:
- You need to check whether the company you aim to buy actually owns all assets you are interested in. It would not be too great to realize that such assets were only leased after you buy them (e.g. the domain).
- Contractual obligations with other partners (beyond the assets you are interested in) will remain in place. Sometimes those contracts have a so-called “change-of-control” clause in there, which allows the contractual partner to cancel the contract if the company is being sold.
- If there are legal issues pending, you take over that risk as the new owner of that company.
The decision of whether to acquire a company by means of an asset deal or a share deal is a complex decision.
It is true that the asset deal has its charm, especially from the buyer’s point of view (e.g. the manual identification of the assets to be transferred). However, a share deal seems easier to handle (but can bear it’s risks, too).
While it seems that most websites sold today are sold as an asset deal, this is not necessarily the best option (e.g. especially as you might lose existing customer contracts). So do the right due diligence and choose wisely.
Are you unsure of your specific situation?
Contact me and I am happy to refer a good tax / legal advisor.