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



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 I m 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. You ll 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 won t get much write-off against the real value of the equipment, furniture and other capital assets that come with the company.

If you don t 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, you ll have to deal with any lawsuits in which the company was involved and you ll 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 they re 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.

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.

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.

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