Robbins: Do you want the whole enchilada or just ingredients? (column)
March 12, 2019
"I want the whole enchilada," my client said firmly.
Although it made my mouth water — lunchtime was most definitely rolling around — it caught me off guard as we were sitting in my office, not a tortilla, ancho chili or mole chicken in sight. All I could think to say was "Yum!"
"I mean it," my client insisted. "The whole thing!"
I leaned forward on my elbows, shaking off the thought of gooey melted cheese. When I forced my voice up over the watery flow, I said, "Are you sure you know the difference?"
"Sure," he said. Then he then amended with, "I think I do." Then he added weakly, "Do I?" It was like watching hot coffee dissolve a sugar cube.
"Well then let's take a minute to review."
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"As your mother likely told you," I began, "there are two ways to buy a business. One that is on-going anyway."
He was taking mental notes. "Go on."
Not the enchilada
"In an asset purchase, you are buying stuff. And not necessarily all the stuff." The enchilada comment led me to a grocery analogy. "You can pick the cherries but not the raspberries, the broccoli but not the Brussels sprouts."
Not that I blame him, but he answered with a "Huh?"
"In an asset purchase — so long as the buyer and seller agree — you can determine what will be included in the sale and will not. You can agree that you will get the goodwill, the client and vendor lists, the receivables, and so on, but that there are other things that will not be included in the sale." Trying to rescue my prior failed analogy, I offered, "Sorta like picking and choosing what you want in the grocery store."
"Whereas," I threw out sort of imperiously, "in a stock purchase, you are buying the thing itself — the entity. The whole enchilada, if you will. While in an asset purchase, you are buying certain assets — only those assets and not others — with a stock purchase, you are buying the company. You are stepping into its shoes. You are buying the stock and therefore everything that comes with it; the assets — all of them — and the liabilities. All of those as well."
"Got it. Give me the pros and cons."
"In an asset acquisition, if you are the buyer, you will be able to specify the liabilities you are willing to assume while leaving other liabilities behind. 'Here's my deal,' you say and the seller is free to take it or leave it or try to reach some middle ground. In a stock purchase, by comparison, the buyer is purchasing lock, stock and barrel. There may be some bits you don't want or even certain liabilities that are unknown or uncertain."
"Tell me more."
"A downside may be that in an asset purchase, it may be necessary for the assets — once they're sold — to be re-titled in the buyer's name. Not so much with a stock purchase since you're buying the company and the company already owns the stuff.
“On the flip, getting a little techy now, if in an asset purchase the price exceeds the aggregate tax basis of the assets being acquired, the buyer will receive a stepped-up basis in the assets equal to the purchase price. So that's a thing.
“An upside to a potential stock purchase transaction may be that the buyer can most times obtain the selling company’s non-assignable contracts, permits, and licenses without the consent of the other party to the contract, permit, or license since they'd still be doing business with the same 'person'."
I felt a "yeehaw" coming on, but my client stifled it. I forged on.
"By purchasing assets rather than stock, the buyer avoids the problems presented by minority shareholders — if there are any — who refuse to sell their shares or who are holding out for a pot of gold. On the downside, asset purchases kinda never qualify for tax treatment as a tax-free reorganization. Another plus, though, in an asset purchase is that goodwill can be amortized by the buyer for tax purposes over a period of 15 years.”
There are other things too; securities issues and such that may or may not come into play. If the selling company doesn't have a large number of shareholders, a stock transaction will usually be less complicated. But then there's the whole kit and caboodle thing."
"Maybe," my client came around to say, "I don't want the whole enchilada. Maybe I just want some bits and pieces. Either way; you can write it up?"
"Indubitably," I answered.
"Maybe I should think about this a little more — how I want to slice it."
"Good call," I said. "Hey," I rubbed my hands together, "why don't we discuss it over lunch?"
Rohn K. Robbins is an attorney licensed before the bars of Colorado and California who practices in the Vail Valley with the law firm of Stevens, Littman, Biddison, Tharp & Weinberg LLC. His practice areas include business and commercial transactions, real estate and development, family law, custody and divorce and civil litigation. Robbins may be reached at 970-926-4461 or at his email address, email@example.com.