Asset Purchase vs Stock Purchase – What’s the better transaction?

Business lawyer speaking to his client regarding asset vs stock purchases.

How to distinguish the difference between an asset purchase and a stock purchase

It’s exciting to buy or sell a business.  It’s a time full of many considerations and many questions.  The most fundamental question is whether to structure the transaction as an asset purchase or as a stock purchase.  The answer you pick will have many implications.  Consider the following.

Why is an asset purchase good?

Buyers tend to prefer asset purchases for several reasons.  First, when the assets being purchased are highly depreciated, the buyer of assets can set up the tax basis of the assets allowing the buyer to depreciate the assets.  Second, since the buyer chooses what liabilities to buy, the buyer can exclude specific assets.  This allows the transaction to be tailored to the wishes of the buyer.  Third, the buyer only purchases the assets – the seller remains in possession of the company’s liabilities.  In the event there are large or unknown liabilities, this is a strong method to protect the buyer.

Why is an asset purchase bad?

There are a few disadvantages of the asset purchase that a buyer should understand.  For instance, the buyer may need to renegotiate the contracts of the company as they do not automatically transfer.  Additionally, the buyer may need to renegotiate employment agreements with employees.  Finally, the buyer may need to retitle the purchased assets.

Why is a stock purchase good?

In a stock purchase transaction, a buyer purchases all of the stock of a company and thereafter owns the company.  This includes all of the contracts, employees, assets, and liabilities of the company.  One advantage here is that it allows a buyer to purchase some non-assignable contracts.  This is because the contacts remain in the name of the company, now owned by the buyer.  Additionally, since the assets of the company remain in the company, there is no changed tax treatment.  Finally, for companies with a few stockholders, the stock purchase is a simpler and therefore cheaper transaction.

As noted above, there are significant tax and business consequences when choosing between an asset or stock purchase for your business transaction.  When contemplating a transaction be sure to reach out to competent tax and legal counsel.

Brad is an attorney with Hammerle Finley Law Firm and his focuses on all manner of business, banking, and real estate matters.