Question

In: Accounting

From the "net after-tax" cost of the acquisition aspect, explain why the buyer tend to choose...

From the "net after-tax" cost of the acquisition aspect, explain why the buyer tend to choose stock purchase offer than assets purchase offer.

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Expert Solution

At the time of buying a business, the acquirer has a choice of structuring the purchase transaction either as a stock purchase or as an assets purchase. But buyers generally tend to prefer stock purchase route for buying a business over the assets purchase offer. The buyers (acquirer) has various reasons for preferring the stock purchase route. The most important reason is that the stock purchase method is more simple, less complex, and easier to execute than the asset purchase method. And, most important of all, the buyer will be also able to avoid the payment of taxes for transfer of assets. From the "net after-tax" cost of the acquisition aspect therefore, stock purchase route for buying a business is preferable over  assets purchase.

When the buyer buys the stock of the target company, the ownership of the business is automatically transferred to him. Unlike asset purchase method, the buyer does not have to incur substantial costs for getting the individual assets revalued. The takeover of the assets and liabilities of the target company by the buyer is automatic and complete on buying the stock, and there is no need for transferring the assets and liabilities by way of transfer deeds or such other legal documents. Moreover, the rights under the non-assignable licenses, leases, permits, etc. of the target company are also transfered to the buyer which are otherwise not generally transferable. There is also no need for the buyer to renovate or renegotiate the existing contracts of the target company with its employees, customers, suppliers, etc. because all these contracts will remain binding on the parties when the acquisition deal is made through stock purchase.

That is why, buyers find it more convenient and cost-efficient to go for a stock purchase rather than an asset purchase buying a business.


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