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Posted on September 3, 2009

Contributed by Ron Hottes

Should You Buy Assets or Stock When Buying A Business?


Many times when buying a business there are reasons why buying stock or buying assets is the better business decision. Let’s go through the advantages and disadvantages from a buyer’s perspective:

Advantages & Disadvantages of an Asset Sale from a Buyer’s Perspective

Advantages:

* No legal liability for the corporation prior to the purchase (but you will still be named in the lawsuit)
* No liabilities for employees
* Costs paid for the assets are depreciable (but taxable at time of purchase)
* "Clean" credit, reputation, workers comp, etc. (sometimes existing history is better)

Disadvantages:

* No established credit (many times vendors will put you on COD)
* Rehire the employees (typically they ask for raises)
* Negotiate transfer of leases & contracts (typically everyone wants more)
* New licenses
* Operating Capital

Advantages & Disadvantages of a Stock Sale from a Buyer’s Perspective

Advantages

* Established credit
* Many times, no or minimal operating capital required
* Leases are in place (if they are in the corporate name)
* Contracts are in place (if they are in the corporate name)
* Employees are in place with worker’s comp rate established
* Licenses are in place
* No public notification of the sale
* No sales tax on the FF&E
* No deposits required
* Corporation, tax & employment numbers & all documentation in place

Disadvantages

* Legal liability for the corporation prior to the purchase (Seller can indemnify & defend, if around)
* Assets are normally fully depreciated
* Sometimes stock is a hard sell to CPA’s & lawyers

There are always exceptions to all of the above but most of the time these advantages and disadvantages hold true.

About The Author:  Ron Hottes, with Business Team has a business brokerage team of 42 highly skilled and seasoned professionals with offices in Torrance, Woodland Hills and Newport Beach. Our business brokers have over 100 years of cumulative experience and the expertise to help you buy or sell a business in the Los Angeles County area. Reach him by phone at 310-539-8300.

Watch for more blog posts / articles from me in the future!

See all contributions from Ron Hottes

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Comments:

This is an interesting article and good points. It should also be said that the buyer can't just make the choice unilaterally, so to speak. What is good for the buyer may be bad for the seller, so the buyer may want to buy the business a certain way but must understand that it can be a matter of negotiations with the seller. Often, what is good for the buyer is not the best arrangement for the seller, and visa versa.

Posted by: Louis Tek

Yes, a business broker can facilitate a Stock Transfer of privately held companies. All of these small businesses we handle usually privately held (not on any stock exchange). That is the difference for us. If it is a public company we need to be stock brokers.

Posted by: Lee Petsas, UBI

I'm curious if a business broker is able, legally, to offer corporate stock and negotiate a stock sale. Do you have to be a stock broker to do that?

Posted by: David H.

Yes, there are exceptions, as Ron mentions. One is that right now when a new owner, having purchased the assets, rehires employees and signs a new lease, it's as likely that the rates can be negotiated downward as it is that employees and landlord will want more money.

Posted by: Ron F.


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