Why do acquirers prefer asset sales despite the seller facing additional tax?

Acquirers often prefer asset sales primarily because they receive tax benefits through a stepped-up tax basis. In an asset sale, the purchasing company allocates the purchase price to the various tangible and intangible assets acquired. This allocation allows the buyer to reset the tax basis of the identifiable assets to their fair market value at the time of purchase, leading to improved benefits for depreciation deductions.

This stepped-up basis can result in lower taxable income in future years, as higher depreciation expenses can be deducted, improving cash flow and reducing taxes. Consequently, the acquirer can optimize their financial performance as they start using the acquired assets, making asset sales attractive from a financial and strategic perspective.

In contrast, other options do not align accurately with the typical motivations behind preferring an asset sale. While retaining ownership of assets, avoiding legal liabilities, or acquiring better cash flow are considerations, they do not capture the primary financial advantage tied directly to the tax implications of the sale structure. The tax benefits offered by a stepped-up basis stand out as a strong incentive for acquirers in asset sales.