Share This Info:  

Stock Or Asset Purchase? Which Is Best In A Business Purchase?

See All Discussions   •   See All Contributors   •   All New Discussions & Comments

Comments & Replies: 2     Views: 3446     Posted By: Peter Siegel MBA  Peter Siegel MBA: BizBen Founder, ProBuy/ProSell Program Director

Topics: Buying A Business, Deal Structures, Selling A Business     Tags: buying a business, deal structures, selling a business

Was asked this question recently from a business buyer:

"I'm negotiating to buy a business and we're on track with the price and terms. But the seller wants to sell me the stock of the corporation, which is the way the business is set up. I've heard that is unusual and that Iím better off letting him keep the corporation and just sell me the assets of the corporation. My business broker initially said to buy assets and then when we were on the verge of a deal, he said he isn't sure about this, and that I should talk to a lawyer. Any suggestions about this?"

My answer included:

I almost always recommend that a buyer take over assets of the business rather than the stock of the corporation that owns it. There are a number of reasons for this. The two main arguments for buying assets rather than stocks are:

1. Youíll probably be in a poor position tax-wise by taking the stock. The seller/corporation has undoubtedly depreciated the assets down to, or near zero. So you wonít get much write-off against the real value of the equipment, furniture and other capital assets that come with the company.

If you donít buy corporate stock, all the depreciable items you acquire would be given a value in the allocation part of the asset sale, probably giving you plenty of write-off opportunities.

2. A stock purchase deal puts the buyer at a disadvantage with respect to any liabilities or obligations of the corporation. As the new owner of the corporation, youíll have to deal with any lawsuits in which the company was involved and youíll have to pay its debts. Even though the seller incurred obligations for the business, you are responsible for them when you acquire the company rather than just specific parts (assets) of the company.

Buyers almost always insist on asset sales for these reasons. And most sellers comply if they want to achieve a deal.

The only exception might be in the case where the corporation owns non-transferable patents, rights, and licenses needed to conduct the business. If theyíre only available to the corporation you may need to buy the corporation to have access to them.

I'm wondering why your broker changed his/her tune about the advisability of an asset sale. Making that decision is usually a no brainer unless the broker is putting a completed deal followed by a commission check ahead of the goal of getting you a sound transaction.

I would also advise you to seek an attorney's viewpoint on your particular situation.

Would like to hear what other BizBen Users feel about this topic - please comment above and contribute to this discussion.

Replies To This Comment
Contributor: Transactional Attorney  Post ID: 904
I agree with Peter that it's almost always preferable for a buyer to acquire a business as an asset sale for the reasons he mentioned.

If you do have to structure a transaction as a stock purchase there are number of issues to be aware of:

1. Some licenses, permits and contracts are non-transferable or have transfer restrictions even in a stock sale. For example, I frequently come across leases and other agreements with provisions that consider he sale of more than 50% of equity a trigger of the assignment provisions of the agreement. Purchasing the majority of the stock of a company with one of those provisions will not allow you to get around the transfer restrictions. Additionally, some permits and licenses must be held by an individual, not the corporation, and won't simply transfer when you purchase the stock.

2. A well-drafted indemnification clause can help ensure that the seller will still be legally responsible for liabilities which arise under claims for anything that happened before you purchased the business. Unfortunately that just means you have the right to come after the seller if a third party comes after you. It can be difficult and costly to force a seller to indemnify you if they don't do it voluntarily, and they may not have the resources to pay any claims regardless.

3. To address the liability issues it's important to get clearances from the EDD, BOE, FTB and IRS (if there are any outstanding liens) and to run a thorough check on the entity for other liens and litigation. You don't have to wait to get into escrow (or even a purchase agreement) to have a check run for liens and litigation.

4. You can also hold back a portion of the purchase price in escrow for a reasonable period of time to address any liabilities that may arise from the previous owner's operation of the business.

5. Many buyers rely on the fact that the seller is carrying back a note for a portion of the purchase price to help protect them if there are future claims. If you're counting on being able to withhold payment on a seller note if there is a liability issue it's crucial that the note is properly drafted to allow you to do that. Otherwise you may inadvertently trigger a provision that requires immediate payment of the note in full.

6. If you're being forced purchase the business as a stock purchase because of a license, permit or contract transfer issue, you should work to negotiate a lower purchase price than if the transaction were being done as an asset purchase. Having your accountant prepare a comparison of the tax consequences to you for both scenarios can help you better understand the actual cost and show the seller exactly why the business should priced less accordingly.

I agree with Peter and Mark that almost always in the transfer of small business ownership the asset sale is preferable to the stock sale.

But, there are exceptions. A case in point is a listing we currently have for a non-emergency ambulance company. There are permits and licenses from about 70 different municipal and county jurisdictions, over 40 healthcare provider contracts, and more than two dozen vehicles with specific certifications and permits. It would be a logistical nightmare to transfer all these legal relationships from one corporation to another; so, this is one of the rare circumstances in which a stock sale makes much more sense for both the buyer and the seller.

When transferring the ownership of the corporation, the liability for tax and creditor claims does not change, and generally they are not "paid off" in the closing; but, nevertheless, as Mark pointed out, the escrow agent must make all the typical searches -- for example, sales taxes, employment taxes, UCC-1 lien filings, commercial creditor claims, federal and state income tax liens, etc. Then appropriate adjustments need to be made to the purchase price. Also, though, additional in depth investigation, beyond that typical for an asset sale, needs to be made regarding existing and potential lawsuits of every kind, potential tax audits on prior years, potential regulatory actions resulting in financial liability, and more; and, then, appropriate escrows, bonds, loan set-off provisions, and indemnifications need to be created to assure that the seller insulates the purchaser from the economic impact of any such liability.

Finally, without a doubt the purchaser will pay less in a stock sale than in an asset sale. The seller will generally have a more favorable tax treatment and the seller a less favorable tax treatment; so, the consideration should be adjusted accordingly.

  Helpful Resources To Assist In Selling And Buying California Businesses
Shalonda Chappel-Pilgram: Escrow Services - Southern CA

Escrow services to brokers & agents, owner/sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Brad Steinberg, Broker - Laundromat Specialists

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Joe Sandbank, Esq. - Legal Services

I have provided legal counsel to business buyers, sellers and brokers for over 17 years. With prior experience as a business broker and SBA loan officer, Joe brings both a practical and legal approach to all aspects of the business acquisition process.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
Tips For Faster SBA Loan Approvals For California Small Business Purchases

In this article on BizBen, business purchase financing advisor and SBA loan broker, consultant Peter Siegel (Business Purchase Financing Expert/Advisor & the ProBuy Program Director at BizBen) at 925-785-3118 shares his views of getting SBA loan financing faster for business purchase financing.

Find Out Why 80% Of California Business Buyers Never Find And Buy A Business

First the dreaded statistic: 80% of all California business buyers looking to buy a small to mid-sized business in California never end up doing so! Peter Siegel, MBA BizBen Founder And Director at 925-785-3118 covers successful tactics all business buyers of small businesses should utilize.

Why Isn't My Business Selling? 6 Great Questions To Ask Yourself For Answers

It can take months, sometimes longer to sell a small business. Here are 6 questions from Peter Siegel, MBA (Business Purchase Financing Expert, ProSell Program Advisor with BizBen) at 925-785-3118 to ask yourself to help you determine why your small to mid-sized California business isn't selling.

What Should I Do If Other Buyers Are Trying To Buy The Same Business As Me?

Buying a small business is hard enough when there is no competition, so how might a buyer navigate the process when there is additional competition from other buyers? Potential small business buyers are offered a few key ways that a buyer can beat out other potential business buyers in this article.

How To Determine Whether The Buyer For Your Business For Sale Is Sincere

A problem owners encounter when offering a CA business for sale is that not all so-called business buyers are qualified to make the purchase. It's frustrating and costly to waste time showing non-qualified buyers the business. Here are ways to identify time wasters so the focus is on real buyers.

Buy A Business Or Start From Scratch? 5 Key Differences For Business Buyers

Some buyers believe it's better to start a business from scratch rather than buy an existing enterprise. While this may be good advice in some cases, usually it's not the best strategy. Here are five tips to help a buyer make the right decision from from Peter Siegel, MBA (BizBen Director).

5 Myths About Selling A California Business: Best Tips For Sellers & Brokers

Peter Siegel, MBA (at 925-785-3118) - BizBen Director discusses myths associated with the process of selling a business and some of them can actually cause deals to fall through. Don't let your sale be comprised, be aware of these common misconceptions related to the process of selling a business.

Why Deals Fall Out: Unrealistic High Asking Prices Are Usually The Reason

The unfortunate truth is that approximately 50% of all small business sales transactions fall out. While failed transactions can happen for a many reasons, Peter Siegel, MBA (BizBen Director & Business Purchase Financing Expert) discusses the main reason deals fall through; steep asking prices.

See All News, Tips And Events

Tim Cunha Business Brokerage
Business Purchase Financing SBA Loans
Restaurant For Sale Mono County
Rob Harman Business Broker SF Bay Area
Google Plus You Tube
Vlogs and Podcasts

Auto Related
Business Services
Children Related
Communication Related
Computer, Internet Related
Construction Related
Entertainment Related
Financial Services
Health, Beauty Related
Home Improvement Related
Maintenance Related
Manufacturing Related
Media, Publishing Related
Pet Related
Photography/Video Related
Real Estate Services
Restaurant, Food Related
Retail Related
Service Related
Sports Related
Transportation Related
Travel Related
Wholesale Related

Auto Body Shops
Auto Repair Shops
Bars, Sports Bars
Cafe Restaurants
Car Washes
Cleaning Services
Clothing, Apparel Stores
Coffee Shops
Convenience Stores
Deli Restaurants
Discount, Dollar Stores
Dry Cleaners
eCommerce Websites
Fast Food Restaurants
Florists, Flower Shops
Full Service Restaurants
Gas Stations
Gift Shops
Gyms, Fitness Facilities
Home Health Agencies
Ice Cream Shops
Juice, Smoothie Shops
Liquor Stores
Markets, Marts
Pizza Restaurants
Postal, Shipping Stores
Preschools, Day Care
Print Shops
Salons, Beauty Shops
Sandwich Shops
Smog Test Only Shops
Smoke Shops
Spas, Med Spas
Sushi Restaurants
Tire Shops
Towing Services
Vending Routes
Wireless, Cellular Shops
Yogurt Shops

Contra Costa
Del Norte
El Dorado
Los Angeles
San Benito
San Bernardino
San Diego
San Francisco
San Joaquin
San Luis Obis
San Mateo
Santa Barbara
Santa Clara
Santa Cruz

0 to $99,999
$100,000 to $249,999
$250,000 to $499,999
$500,000 to $999,999
$1 million to $2 million
over $2 million

BizBen - Where California Deals Get Done! 925-785-3118
7172 Regional Street #364 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2019, All Rights Reserved

               Vlogs and Podcasts  
Join Us On Social Media - Content Updated Daily
Sign Up Today - For Our FREE BizBen Weekly Email Newsletter
Includes The Best Info On Buying, Selling, Valuing, Financing California Businesses:
Articles, Blog Posts, Podcasts, Videos/Vlogs, Discussions, Q&A, Workshops, Webinars,
Resources. Watch For An Email Confirmation After Signing Up Above. Thank you.
Clost Login

Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.

First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*

You Are A:

Email Address:

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
Selling Your Business To One Of Your Employees - A Good Idea? Pros And C...
Read More News
Buying A Cheap Small Business For Sale: How To Find? What To Watch Out F...
Read More News