How to Structure Acquisitions to Save Millions on Taxes: Asset Deal vs Equity Deal

We've bought 3+ software companies now and have learned a few things about deal structuring.

Here's how you should structure deals to save millions on taxes and avoid risk.

At a high level there are two different deal structures:

Asset purchase or equity purchase.

One is a headache and one is not.

Asset Purchase:

With an asset purchase, the buyer purchases the assets they want and only the agreed-upon liabilities.

For software buyouts, the most valuable things are intellectual property (software code) and customer contracts.

Start with a clean slate.

Equity Purchase:

With an equity or stock purchase, the buyer purchases the stock of the company from the existing shareholders.

This can be whole or part of the company, but it means taking on all of the assets and liabilities whether you want them or not.

Baggage comes with.

Asset Deal Pros / Cons:

Pros:

- Simpler deal - leave liabilities & old obligations behind

- Tax benefit - depreciate purchase to offset profits

- Pick just assets you want

Cons:

- Potential issue transferring contracts or licenses

- Seller will prefer an equity deal for taxes

Equity Deal Pros / Cons:

Pros:

- Straightforward

- Customer contracts & licenses transfer

Cons:

- Assuming more risk - all liabilities transfer

- No tax benefit - can't depreciate the purchase

- Purchase agreement negotiation is longer and more complicated to protect yourself

How do we structure deals and how should you?

Asset deal is right for most small deals. We've only done asset deals so far.

We've been close on a few equity deals for change of control provisions (big enterprise customers) or international issues, but they didn't work out.