Business Brokers Blog: Guide to Buying or Selling a Business

Business Deal Structure - Asset vs. Stock Transactions

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Depending on the size of your business and the specific situation, a buyer may propose to purchase the assets of your corporation or a buyer may chose to purchase the stock of your corporation as far as the deal structure of the business transaction.  Depending on which method is chosen, there are different pros and cons to each party.  Let's take a look at the advantages and disadvantages form a buyer's perspective:

Asset Sale vs. Stock Sale

Advantages

• No legal liability for the corporation prior to the purchase
• No liabilities for employees
• Costs paid for the assets are depreciable
• "Clean" credit, reputation, workers comp, etc.

Disadvantages

• No established credit
• Rehire the employees
• Negotiate transfer of leases & contracts
• New licenses
• Operating Capital

Stock Sale vs. Asset Sale

Advantages

• Established credit
• Many times, no or minimal operating capital required
• Leases are in place
• Contracts are in place
• Employees are in place with worker's compensation rate established
• Licenses are in place
• No public notification of the sale
• No sales tax on the FF&E
• No deposits required
• Corporation, tax & employment numbers & documentation in place

Disadvantages

• Legal liability for the corporation prior to the purchase
• Assets are normally fully depreciated
• Sometimes stock is a hard sell to CPA's & lawyers

By looking at the information above, you will see clear advantages and disadvantages for each deal structure scenario.  Taking a look at what we typically see on the front lines, a Buyer in most cases will be instructed by their accountant and lawyer to structure the deal as an asset purchase.  The main two reasons are to not purchase the previous liabilities that may have occurred prior to the purchase as well as gaining the ability to re-depreciate the assets that are purchased from their new cost base, a tax benefit for a new business that has just purchased the assets.  The typical struggle that we see in negotiations is that a Seller will typically be advised to try to have the buyer purchase the stock instead because the business seller could walk away from some liabilities, but the driving factor in most cases is the idea that a seller will be taxed differently - capital gains - which at this time is a lower percentage.  There are exceptions to the rules for small businesses and for very large businesses it is more common for stock transaction, but the majority of businesses sold end up going the route of the asset purchase deal structure.  In many cases, a seller that will demand a stock purchase only, will eliminate a large number of potential buyers because the risk of assuming past liabilities and not gaining the ability to re-depreciate the assets are two large enough issues that will cause a business buyer to pass up on your opportunity and pursue something else.