Structuring Asset Transactions - When is an asset transaction necessary or desirable?

Many times, the choice of an asset transaction is dictated by the fact that the sale involves only part of the business owned by the selling corporation. Asset sales are generally the only choice in the sale of a product line that has not been run as a subsidiary corporation with its own set of books and records.

In other cases, an asset deal is not necessary but is chosen because of its special advantages. Where the seller will realize a meaningful taxable gain from the sale (meaning the “tax basis” of the assets in the acquired company is materially lower than the selling price), the buyer obtains significant tax savings from structuring the transaction as an asset deal, thus stepping up the assets’ basis to the purchase price.

An asset’s tax basis is the amount paid for the asset, adjusted for depreciation or amortization; tax basis may be similar to the value at which the taxpayer carries the asset on its balance sheet—generally its historical cost, subject to upward or downward adjustment. A tax-basis balance sheet records all assets in accordance with the principles and rules for accounting for transactions under the federal income tax laws and regulations. Conversely, if the seller will realize a tax loss, the buyer is generally better off inheriting the tax history of the business by doing a stock transaction, keeping the old high basis.

As these examples show, taxes are a zero-sum game. Taxing authorities looking at the sale of a business will want any declared losses or gains to match up. Therefore, what is best for the buyer might not be best for the seller, who might lose tax advantages by structuring the deal in favor of the buyer. This conflict can and should give rise to lively negotiations—even an adjustment of price in favor of the conceding party. Concepts of stepped-up versus carryover tax basis will be discussed in greater detail later in this chapter.

Another advantage from an asset sale is that the buyer in an asset sale assumes only the liabilities that it specifically agrees to assume. This ability to pick and choose among the liabilities generally protects the buyer from undisclosed liabilities of the seller, though exceptions do apply.