Advantages & Disadvantages of Acquisition Methods

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The term "acquisition" refers to the purchase of a business -- or part of it -- by another company. Even though acquisition is sometimes placed alongside the word "merger," they are actually two different procedures, as in the latter, two separate organizations become one. Acquisitions are possible in two ways, either by buying part of a company's assets and/or liabilities or by buying all its stock, inheriting all assets and liabilities.

Assets Acquisition Advantages

  • In assets acquisitions, the buyer can choose exactly which assets to acquire (liquid assets, real estate or intellectual property, for instance), as well as which liabilities it can cover (leases, bank loans, mezzanine loans and so forth). This gives buyers the opportunity to choose the option with the most-profit/least-cost potential. In addition, goodwill (the difference between the price of a business and the value of its underlying assets, signifying its capability of generating profits) is tax-deductible and can be amortized over 15 years, according to Internal Revenue Code Section 197.

Assets Acquisition Disadvantages

  • Selecting another company's assets and liabilities and scrutinizing them can be a costly and time-consuming process. It potentially requires the services of financial assessors to identify and evaluate the value and potential of an asset (or the danger of a liability). Furthermore, your legal team must also arrange the title transfer of individual assets and liabilities. Therefore, the cost of an assets acquisition can become significantly larger than the nominal value of the purchased assets/liabilities.

Stock Acquisition Advantages

  • The procedure of stock acquisition is the opposite of assets acquisition. It's a straight and clear purchase: you buy the shares of previous shareholders, effectively gaining control of all assets and the burden of covering all liabilities. However, stock acquisition contracts can also provide for transfer of unwanted liabilities back to the seller. This means that if the buyer finds a liability extraordinarily expensive or irrational (for example, renting a 15,000-square-foot building for a relatively unknown bookstore), he can return this liability to the seller.

Stock Acquisition Disadvantages

  • In stock acquisitions, when assets are not scrutinized, it is not impossible for the buyer to acquire so-called "toxic assets." The value of such assets has considerably fallen -- or is highly likely to fall in the near future -- but buyers cannot be aware of this until they possess them. Such assets can be bank deposits in weak currencies and leisure facilities in areas recently struck by natural catastrophes. In addition, stock acquisitions don't feature any of the tax deductions on goodwill.

References

  • Photo Credit Brand X Pictures/Brand X Pictures/Getty Images
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