Buying a Business: Asset or Stock Sale?
26 December 2022: Buying a Business: Asset or Stock Sale?
Though most of our work is on behalf of sellers – that is, we help business owners find buyers for their business – we sometimes work as buyers’ brokers helping buyers – individuals and companies – through the negotiation and acquisition process when buying a business.
Buyers and sellers, though working toward the same ultimate goal, usually have different paths for reaching that goal. Certain aspects of the process – such as determining the percentage of the acquisition price to be allocated to goodwill or hard assets – can impact the parties differently. Another issue is identifying liabilities that a buyer may not want to assume.
But those issues are at the tactical level. At the strategic level, transferring the ownership of a business generally happens in one of two basic ways: an asset sale or a stock sale
We visited this topic on a number of occasions over the past six years of producing these journalistic gems but it’s a very important issue for buyers to be aware of and to factor into their decision to buy – or not to buy – a particular business.
In and asset sale, the buyer buys all or some portion of the assets but not necessarily all the assets or even any of the liabilities.
For instance, in an asset sale, the buyer might choose to exclude certain outdated inventory, receivables over 60 days old, obsolete FF&E, idle or unproductive real estate and the like.
One of the biggest concerns buyers have when acquiring a business is the business’ liabilities, both disclosed and unknown. A primary example of the latter is unpaid employment taxes.
If the seller has withheld employment taxes from the employees’ paychecks but failed to submit those withheld taxes to the taxing authorities, this might be an issue that doesn’t become evident for several years. But when it does, it could cripple a business because, as a rule, the revenuers look to the company and its existing ownership, not the seller/previous ownership for payment.
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If you’d like to learn more, email me at jo*@Wo*******************.com
In a stock sale, the buyer is buying the company lock, stock and barrel, not just the assets of the company. That means warts and all.
Outdated inventory, uncollectable receivables, flawed contracts and other unpleasant surprises can pop up at any time to the consternation of the new owners. In many cases, this includes unpaid employment taxes.
Remember that, though we refer to this as a “stock” sale, it conceptually encompasses all manner of entity formation: stock in the case of a stock corporation, membership interests in the case of a limited liability company (in the U.S.; similar entity structures in other jurisdiction); partnership interests in the case of partnerships; etc. In a stock sale, the buyer buys the entity; the assets and liabilities. The bad comes with the good.
That means that a buyer must be extra focused when scrutinizing the target business. The degree of intensity of the due diligence process becomes extraordinarily important
Buying a Business: Other Considerations
From the above, it would seem that buying a business using the asset purchase approach would be the best choice – and it often is. But the situation is not always so clear. There are occasions when a stock purchase approach should be considered. Here are two such circumstances.
In an asset sale, the buying entity is acquiring some or all of the target entity’s assets, both tangible and non-tangible. But as much as a business’ employees might be considered “assets” in a theoretical sense, they are not considered assets in the sense of “chattels”. This means that the employees must first be fired by the entity selling the assets – the seller’s entity – and then rehired by the entity acquiring those assets.
For example, when 43-employee Waldo’s Wonderful Widgets approached Three Amigos Widgets, a smaller competitor with only 12 employees, about acquiring Three Amigos, one of the considerations for both parties was the status of the employees. In an asset purchase, all 12 would have to be fired by Three Amigos and, hopefully, immediately hired by Waldo’s. In a stock sale, Waldo’s would buy the entity – Three Amigos Widgets – which would continue to exist and the employees would remain employed by Three Amigos.
Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Another example is in the case of an acquisition of a business with an extensive list of physical assets that require titling – a trucking or distribution company is a case in point.
In an asset purchase of a regional delivery company – one with dozens of trucks and hundred of trailers – the acquiring entity would have to re-title and get new insurance for every one of these acquired assets, a circumstance that could be extremely costly, not to mention time-consuming.
The Bottom Line
There are many matters – some seemingly quite arcane – in the transfer of a business that must be considered and that few buyers or sellers have experience enough to identify. While the same transition structure may not be best for both parties, knowing which is best for our client is critical if we’re to serve them optimally.
If a buyer is not represented by a professional business broker or M&A advisor, the chances of not considering an issue as important as choosing the best strategic approach to the transition risks problems – some possibly quite costly – popping up down the road.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
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.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
We’ve been contacted by a private investment firm looking for U.S-based family-owned businesses in occupational therapy and drug rehab with minimum of $3 million in discretionary earnings/EBITDA.
If any of you know of something that might fit, please let me know.
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The author is the founder, in 2001, 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 500 in the world. He can be reached at jo*@Wo*******************.com