Buying a Business: Asset vs Stock Purchase
06 September 2021
Asset purchase or stock purchase: When buying a business – or when selling one, for that matter – which of these two general categories are better for structuring the deal? There are, of course almost countless ways to structure the deal within both those categories but one or the other approach must be chosen first; and each enjoy both pros and cons for both buyer and seller.The Small Business Conundrum
In many small business sales, buyers are advised to use an asset purchase approach, primarily to shield them from undisclosed or undiscovered liabilities, the most common of which is unpaid taxes.
Asset Purchase
As a rule, potential legal liabilities and tax implications are usually the parties’ primary concerns in an asset purchase. Aside from the example of the tax liability that I touched on above, there is the potential for additional tax liabilities – based on how the parties allocate the purchase price and a tax professional should be consulted to avoid potentially mistakes in this area. But potential legal liabilities can be just as onerous – and sometimes more so. _____________________________________________________________________________Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to value and sell businesses.
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For example, in the case of a small manufacturer or distributor of chemicals – or of products that contain chemicals – the potential for lawsuits can be significant. This is particularly true in the United States where suing everybody in sight seems to have become a national pastime. An asset purchase protects the buyer from most of these types of liabilities if they arise from the business’ practices prior to the transfer. But an asset purchase also has some disadvantages. For starters, for the buyer to be able to keep the employees, the seller must fire them and the buyer must then re-hire them. This can be an immense challenge especially if some of the employees have employment contracts with the company. Another issue is the cost and time required to re-title certain assets.
Stock Purchase
In a stock purchase, the buyer takes over the business entity lock, stock and barrel. The transaction is simpler and more straightforward but includes all the liabilities, known and unknown. Rarely will contracts – employment, vendor, customer or any others – need to be dealt with. They transfer automatically and seamlessly to the new owner. Some of the advantages of a stock purchase include no need to value or re-title any assets. That small fleet of delivery vehicles stays in the name of the business.We’ve launched a coaching program specifically tailored to Realtors that want to sell businesses, business owners and to anyone that wants to become a business broker.
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Employees stay employed by the company and no employment contracts are breached or need to be renegotiated. The same is true for vendor and customer contracts. They, like all other assets and liabilities, simply pass with the business entity to the buyer; UNLESS there is a change-of-control provision in any of them. As with asset purchases, stock purchases have their own disadvantages. A big one is that the buyer can’t pick and choose what assets and liabilities to include. They’re ALL included – the good, the bad and the ugly.

The Bottom Line
The vast majority of deals are asset purchases rather that purchases of the stock of a corporation (or the membership interests of a LLC). The main reason is that knowledgeable buyers generally are not comfortable with the potential of acquiring liabilities that they don’t even know exist. So, which type of sale is the right one for a particular buyer? The answer to that question requires the input of talent – a tax advisor, a financial planner and an experienced business broker. If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.Searching
This week we received an inquiry from a small private equity fund looking for B2B opportunities, with recurring revenue and low capital intensity located anywhere in the United States. If any of you know of something that might fit, please let me know.I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe

The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com