Advantages of Making Business Acquisitions with Stock
The stock of a corporation that has financial statements audited by an independent Certified Public Accounting firm, or a public company, can be used to acquire other businesses including competitors.
Acquiring stock in a corporation that is generating consistent earnings and that is increasing in book and/or market value per share, may be more valuable to the seller of a business than cash. The issuance of stock to the seller of a business clearly has advantages to the buyer as well.
Following are some of the advantages and disadvantages to buyers and sellers of businesses when stock of the buyer’s corporation is used as all or a substantial part of the purchase price:
Advantages to the Acquiring Business
- Cash is conserved. The acquisition is made without cash; and
- Borrowing funds is unnecessary which means that principle and interest payments can be avoided.
Disadvantages to the Acquiring Business
- The ownership interest of the shareholders is diluted as a percentage;
- The seller of the business acquires a degree of control in the combined business through the ownership of his or her stock; and
- Using stock may require paying a higher price for the business.
Advantages to the Seller of the Business
- The seller acquires an ownership interest in the combined business which may be highly profitable;
- The seller may be able to obtain a substantially higher price in consideration of forgoing a cash down payment; and
- The seller may be able to obtain a substantially higher price in consideration of accepting stock instead of a secured promissory note that pays fixed principal and interest payments.
Disadvantages to the Seller of the Business
- The seller does not receive cash; and
- The seller does not receive a note with fixed monthly payments.
The value placed on the stock of the seller’s corporation (by both the seller and buyer) will vary depending upon many factors including but not limited to the following:
- Does the corporation have a track record of paying dividends and are dividends projected to be paid in the future?
- Is the income being generated by the corporation reliable or does it fluctuate materially from month to month?
- How easily can the stock be sold? Is there a market for the stock?
- Are the financial statements of the corporation audited by an independent CPA firm and is the auditor’s opinion unqualified?
- Is the stock voting stock or non-voting stock?
- Does the stock receive any preferences?
- Will the combined business result in substantial growth and/or operating cost savings of as a result of the synergy developed?