Business Organization and Transaction – FAQ Archives
What are the differences between an asset purchase and a stock purchase of a business?
When purchasing an existing business, the buyer must determine whether to purchase the assets of the business or the stock of the business entity. Because the types of sale offer advantages and disadvantages for each party, the buyer and seller must come to an agreement to make the sale.
What does an asset purchase offer from a buyer’s or seller’s perspective?
In an asset purchase, the buyer will only buy certain assets of the seller’s company. The seller will continue to own the assets that were not included in the purchase agreement with the buyer. The transfer of ownership of certain assets may need to be confirmed with filings, such as titles to transfer real estate. In most cases, an asset purchase protects the buyer because the buyer will only assume liability for the assets included in the purchase agreement. The seller will still be liable for assets not sold.
By purchasing assets rather than stock, the buyer avoids the problems presented by minority shareholders who refuse to sell their shares. Purchasing a business through an asset acquisition is less complicated from a securities law perspective because the parties are not normally required to comply with state and federal securities laws and regulations.
But asset purchases do not gain the buyer preferential tax treatment since asset purchases do not qualify for tax treatment as a tax-free reorganization.
What does a stock purchase offer from a buyer’s and seller’s perspective?
In a stock purchase, the buyer purchases stock in a company that may have unknown or uncertain liabilities. Unless the company is publicly traded, it can be more difficult for a buyer to value the stock of a company it intends to purchase. Furthermore, the seller in a stock purchase can walk away without liability after the transaction is completed.
From the buyer’s perspective, some advantages can be gained in a stock purchase. For example, the seller’s assets do not need to be re-titled in the name of the buyer. The buyer can normally obtain the selling company’s non-assignable contracts, permits and licenses without the consent of the other party to the contract, permit or license.
Buyers can obtain preferential tax treatment in a stock purchase as well. Goodwill can be amortized by the buyer for tax purposes over a period of years. In states that impose sales or transfer taxes on the sale of assets, a stock transaction can avoid some or all of these taxes. Sellers of stock must register a gain or loss on the transaction for tax purposes, depending on the sale price of the stock and the sellers’ basis in the stock.
Unlike an asset purchase, buyers of stock will assume the tax liabilities of the seller, so buyers should ensure that sellers pay any tax liabilities before the sale. Buyers can also obtain a promise from the seller to pay any pre-sale tax liabilities that are not discovered until after the sale. In some cases, the parties may agree to set aside a certain percentage of the proceeds in an escrow account to pay off any undiscovered liabilities.
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