Deal Structure: Asset vs Entity Deals

When it comes to structuring a deal, there are different factors you need to consider. For instance, you might ask yourself: Is an asset deal better than an entity deal?

In this article, we will discuss the difference between the two further and dwell deeper on how each one has its own purpose. First, let’s discuss asset deals.

Asset Deals

There are plenty of advantages when it comes to asset deal. One of these advantages is that the buyer doesn’t have to accept all the target’s liability. This is a great advantage for the acquirer. It is the subject of most negotiation between the seller and the buyer.

In almost all cases, the seller will want the buyer to accept more liabilities, naturally, and the buyer will want a few liabilities. Buyers usually prefer an asset deal because of limited liability exposure.

Additionally, the buyer can pick and choose which assets they want and they don’t necessarily have to pay for assets that they are not interested in. This is an additional benefit for the buyer’s side.

Furthermore, an asset deal has potential tax benefits. Of course, all of the assets acquired as well as the liabilities incurred should be listed in the asset purchase agreement once the buyer and seller come to a mutual understanding.

There’s also what we call the asset basis set-up where the buyer can raise the value of the acquired assets to fair market value as opposed to the values they may have been carried at on the seller’s balance sheet. This way, the buyer can benefit from more depreciation in the future. As a result, the buyer may also lower their taxable income and taxes paid.

But what about the seller? Most sellers prefer a whole entity deal. This is because a seller may be left with assets they do not want in an asset deal. For instance, a seller wants to sell most of their asset, and that can’t be done immediately in an asset deal. Especially because the seller might be left with liabilities that they would prefer to get rid of.

Additionally, the seller may possibly get hit with negative tax consequences due to the potential taxes on the sale of the assets and then the taxes on a distribution to the owners of the entity. Keep in mind that tax issues are very crucial when it comes to Mergers and Acquisitions.

This is only one of the reasons why there is a lot of legal work that needs to be done in mergers and acquisitions. These legal works are not only done by transactional lawyers but by tax lawyers as well. When it comes to doing these deals, having attorneys who are merger and acquisition tax specialist are crucial.

There are also more drawbacks to asset deals. For instance, the seller may have to secure third-party consents to the sale of the assets. This is especially necessary when there are clauses in the financing agreements that the target used to acquire the said assets. Or if the seller has a lot of contracts with nonassignment or nontransfer clauses that are associated with them.

In order to do these an asset deal, the target first needs to get approval from all the relevant parties. If there are a lot of relevant parties involved, the deal becomes more complicated. In these cases, the asset deal becomes less practical, and if it is necessary for the deal to be done, it may have to be an entity transaction. Which leads us to entity deals:

Entity Deals

For starters, you need to understand that there are two ways to do an entity deal. First is a stock transaction, second is a merger. A stock deal is ideal and more practical when the target has a limited number of shareholders. This is because securing the approval of the sale by the target’s shareholder may not be as difficult. The fewer shareholders, the more practical a stock transaction is.

In stock entity deals, the buyer does not have to buy the assets and send the consideration to the target corporation as opposed to an asset deal. In these cases, the consideration is sent directly to the target’s shareholders who sell all their shares to the buyer instead.

There are no conveyance issues when it comes to stock deals, this is one of its main advantages. There are no instances where they may have been the aforementioned contractual restrictions on the transfer of assets. The assets firmly stay with the entity and remain at the target when it comes to stock deals.

Another benefit of a stock deal is that there are no appraisal rights. As opposed to mergers where shareholders who do not approve of the deal may want to go to a court to pursue their appraisal rights. The shareholders may also seek the difference between the value they received for their shares in the merger.

On the other hand, we have a merger. Merger entity deals are more common for publicly held companies. These merger deals are partly a function of the relevant state laws which varies from state to state. In merger deals, constituent corporations are the companies doing the deal where one survives (called the survivor) and the other one ceases to exist.

In these type of deals, the surviving company succeeds to all of the liabilities of the nonsurviving company. In any case that there are assets that the buyer doesn’t want, these can be spun or sold off before the merger is complete.

Mergers also require the voting approval of the shareholders. The percentage of approvals can vary across different states. There are also cases where a corporation enacted supermajority provisions in each bylaw. For those shareholders who do not approve of the deal, they can go to court to pursue their appraisal rights.

There you have it, the difference between asset and entity deals. Take this information at heart, study each type of deals and decide which one is more suited for your company.