Buying a Business - (Stock Purchase vs. Asset Purchase) 



Buying an existing business could be a lucrative endeavor but the question is: Should you acquire the business as a stock purchase or an asset purchase?

Let me clarify the difference as it could get rather confusing especially if you’ve never owned a business.

A stock purchase is when you buy the outstanding shares remaining with the seller. That includes everything the seller owns – stocks, assets, and liabilities.

An asset purchase is when you buy the company’s assets – real estate, equipment, furniture, vehicles, inventory, and so on...

So which is better? Buying the shares or the asset?

First of all, you should find out why the business is being sold. Ideally, the owner should be either retiring from a steady successful business or the seller has built a business to a level where he/she feels they could cash out and enjoy life.

The business itself, in such a case, should have potential growth and expansion with a solid system in place and good automation ready to be scaled further than its current status.

Like any other endeavor, you must do your own due diligence to understand clearly five factors:

1) The financial status of the business

2) The assets you are acquiring

3) The liabilities you may be assuming

4) The depreciation schedule and other tax benefits you could be using

5) Any potential bank financing you may need

Usually, a corporate lawyer and a good accountant could advise you on what is the best purchase option for you (whether stock or asset) based on the business and its current structure.

So when do you acquire the business through a stock purchase and when would you do it through an asset purchase?

A stock purchase is usually advisable if the business for sale is doing well.

In a stock purchase, you acquire the entire business, including all assets and liabilities when you purchase the company’s stock. So make certain you do full due diligence regarding the liabilities and don’t just rely on the seller’s disclosures.

In a stock purchase, the assets and liabilities are carried over and depreciated as before the sale took place. Meaning, the new asset owner, will just continue deducting depreciation as the previous owner did.

(Depreciation is the process of deducting a portion of the cost of an asset from the income each year).

In a stock purchase, the process is easier, faster, and cheaper to implement, especially if the company only has a few shareholders. There are fewer documents and less paperwork.

In a stock purchase, there is no problem with minority shareholders who may refuse to sell like in an asset transaction. But multiple shareholders could block a buyer’s desire to own 100% of the company in a stock purchase.

In a stock purchase, you inherit the contracts, permits, and licenses. And usually, you can avoid paying for sales or transfer taxes on the sale of assets.

In a stock purchase, however, you may find it harder to get a bank loan for your acquisition.

An asset purchase may be advisable if you wish to change the company, and make it your own (maybe rebrand it).

An asset purchase could reduce your risk factor because you could choose the useful assets you want for your new company and avoid most of the liabilities by identifying only those you agree to assume in writing in your purchase agreement.

In an asset purchase, the assets and liabilities are recorded at fair market value. When you can claim the fair market value of tangible assets for depreciation, you are allowed by law, the full depreciation of the purchase price you paid which results in lower taxes.

An asset purchase may require more documentation. The transfer of ownership of the assets, liabilities, and related contracts may need to be filed or registered with the appropriate government agencies. This is not a requirement in a stock transaction.

In an asset purchase, you would usually need to pay for sales or transfer taxes on the sale of assets.

An asset purchase could also be the best option for bank financing since the bank could easily identify, the assets, the inventory, and the liabilities, etc.

Buying a business is complicated in itself. Each business purchase transaction is unique.

Knowing what you are doing in the due diligence process and obtaining good consultation support from experienced business people, brokers, attorneys, and accountants could make a huge difference in the outcome of your acquisition and your future success.

The End