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Discussions > Stock Or Asset Purchase? Which Is Best In A Business Purchase?
Stock Or Asset Purchase? Which Is Best In A Business Purchase?
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Comments & Replies: 2 Views: 3446
Posted By: Peter Siegel MBA 
Topics: Buying A Business, Deal Structures, Selling A Business Tags: buying a business, deal structures, selling a business
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 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'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.
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.
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.
Contributor: Timothy Cunha JD: Business Broker, SF Bay Area
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.
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 |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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