A business broker needs to know – and explain to his or her client – that there are two ways to buy an ongoing business. The transition can be structured as an asset purchase or as a stock purchase – and each provides some positives and negatives for both the buyer and the seller.

Make no mistake. When you buy the stock, you are also buying the assets but that doesn’t apply the other way around. Why does this matter? Well, the buyer may not want all the assets – such as the antiquated phone system or that conveyor belt that hasn’t been used since 1998.

So, What’s the Difference?

In an asset purchase, a buyer is buying “stuff” – assets. But an important point here is that the buyer need not buy all the stuff. For example, if the company has outdated inventory or raw materials; if one or more pieces of equipment are obsolete; if the company owns the real estate that the business occupies but the buyer plans to move the business, the buyer can, during negotiations try to determine what “stuff” is included in the sale and what stuff is not.

For instance, the buyer might want the client and vendor lists, the intellectual property, the receivables, the two newest trucks and the 70% of the inventory that is not outdated; but not the outdated inventory, the payables or the four beat-up trucks that date from the Clinton administration.

On the other hand, in a stock purchase, the buyer is buying the company itself — the entity. This includes everything that that the company owns – all the assets, but also all it’s liabilities. More on THAT in a moment.

Buying all the assets includes all the outdated inventory, broken-down fork lifts, all the old unusable office furniture that has been gathering dust in the storage building, the 27 IBM computers running DOS and the riding lawn mower that was last started when IBM was still making computers. The transaction includes everything the company owns – and the buyer will have to figure our what to do to get rid of the useless stuff.

But as challenging as ridding oneself of all the useless assets after the acquisition close, liabilities are another story altogether.

Liabilities

Liabilities include contractual obligations, payables, financing instruments, various taxes, pending law suits and a host of other sink holes that can come back to haunt the buyer.

In an asset sale, the buyer should try to specify the liabilities they are willing to assume while having the seller retain certain other liabilities. We have been involved in many deals where the parties negotiated this issue successfully. In a stock purchase, by comparison, the buyer is purchasing the business in its entirety. There may be some pieces the buyer doesn’t want or even certain liabilities that are unknown or uncertain – and that issue, itself, is a major downside and one that causes us, when we are advising buyers, to caution against a stock acquisition.

The Real Potential Danger

What’s so bad about that, you ask? Can’t the buyer confirm during the due diligence period what the company owes? Well, yes and no.

Other Issues

There are other tax issues that must also be considered when determining whether to structure the deal as an asset or stock purchase. Goodwill can be amortized by the buyer over 15 years in an asset purchase but such a purchase may not qualify as a tax-free reorganization.

Another concern in an asset sale is that all the assets that are part of the sale will have to be re-titled in the buyer’s name. In a stock sale, there is no need to do this as the buyer is buying the entity – the company – and the company already owns all the assets.

Similarly, in a stock sale the company’s contracts, permits, licenses and other multi-party obligations and permissions are acquired by the buyer without the need to worry about whether the other parties would agree to assign such obligations and permissions. This lessens “the hassle factor” considerably.

The Business Broker

A business broker or adviser knowledgeable about the pluses and minuses of both asset and stock purchases is, along with the seller’s other advisors, of enormous value when preparing for a sale. Likewise, an experienced business broker’s advice to a buyer could save that client untold headaches and money in both the short and long term. Professional brokers create a “book” or “Offering Memorandum” for the market that describes the company that’s for sale and allows potential buyers confidential access to additional information.

Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.

Become a Professional Business Broker…

The Bottom Line

When we are representing the seller – which is usually, but not always the case – we advise them that a savvy buyer, or one with knowledgeable representation, will probably understand these two methods of acquiring the business. We try to get our client to recognize that certain assets are really not assets at all and the business’ value must reflect this reality.

When we are representing the buyer, we advise our client of the pros and cons of both that asset and stock sale methods of acquisition. It has been our experience that most buyers ultimately feel that the additional hassles involved in an asset sale are far outweighed by the potential liability of a stock sale and we structure the transaction accordingly.