Pest control deal... pros and cons of stock vs asset purchase
March 11, 2024
by a searcher in Philadelphia, PA, USA
So I've been talking to this owner of a pest control company and I am going to give them an offer this week. I am wondering what is the best way to do this deal ie asset purchase vs stock purchase and wanted to chat with those who have completed transactions in this space. We all know the legal safety benefits of doing asset purchases and every deal I've done before this has been as asset purchase. However, neither of those deals had the same licensure requirements or had hundreds of clients on autopay routed to a bank account already. There are also lending requirements to consider (when an asset purchase is done, the newco is treated by banks like a startup). I suppose any insights or people who have dealt with this before would be appreciated.
from University of Notre Dame in New York, NY, USA
1. Tax Implications - It's well known that asset sales are preferable for buyers from a tax perspective; however, depending on the size and asset mix of the business, the actual savings can sometimes be overblown. So if licensure requirements and payment processing make an asset sale tricky, it's worth doing a stock sale from a structure perspective.
2. Liabilities - You can carve out liabilities from an asset sale, which is helpful; but specific indemnification provisions can give you similar back-end protection in the case of a stock sale.
3. Simplicity of transition - As mentioned before if the target business requires a license to operate and already has a rolodex of customers with automatic payment routing, an asset sale could cause a business interruption post-close and a stock sale is more convenient. It's about weighing the pros and cons.
*** F-Reorganizations - One way to get the tax benefits and liability carve-outs of an asset sale for the buyer, but the "convenience" of a stock sale is an F-Reorg under the Tax Code. This usually gives you the best of both worlds from an economics and liability perspective, but is a complicated transaction adding to the time and cost of getting the deal done.
Happy to chat further - I'm actually doing a stock deal now where licensing requirements complicate the structure. DM me or shoot me an email redacted
from Texas A&M University in Phoenix, AZ, USA
If you are able to find a QP who is not the seller, your Day 1 integration planning becomes key to ensure that you minimize client churn. I would consider structuring an earn-out tied to successfully transitioning a minimum % of clients.