In certain circumstances, Buyer may want to use stock to pay for all or part of an M&A deal. And in certain circumstances, Seller may be wise to accept that stock, though she should speak with her tax advisor about the tax ramifications of that arrangement.
Issuing stock allows Buyer to make an acquisition without using cash or borrowing money (or by using less cash and borrowing less money). The downside for Seller is that the stock obviously isn’t the same as cash. Seller has to convert that stock into cash by finding a Buyer for it.
Although Buyers may be tempted to issue more stock as a way of financing an acquisition, they should carefully consider the effects of diluting their stock in that way. Is issuing more stock really the best course of action, or does borrowing money to finance the acquisition make more sense?
The pluses and minuses of accepting stock as a form of consideration really boil down to the issue of liquidity: How easily can Seller sell that stock? Here are a few issues Sellers should consider when thinking about accepting Buyer’s stock: