Q: I am not sure whether to buy assets or shares? What’s the difference?
A:
You want to buy assets NOT shares.
Sellers will want a stock purchase because it will eliminate their future liability. As a buyer you will want an asset purchase to accomplish just the opposite. The first thing you should know is that nearly every small business purchase is an asset purchase, and so it is the norm. Here is a recap of the reasons why you will want an asset purchase:
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As noted above, when buying assets you will not be responsible for any of the liabilities of the business or the seller.
Should any situations arise in the future that are as a result of actions by the former owner, it is their responsibility, not yours. Imagine if a former employee sues the business for something that happened before you owned it. With a stock sale YOU would be responsible.
- You will be able to “step-up” the assets you purchased and depreciate them again. In a stock purchase, you would only be able to depreciate the assets for what the remaining depreciation schedule is in the business. This is a huge advantage for you.
In very rare situations, a stock purchase may be your only option.
This can happen when the business has certain licenses or permits in place that are crucial to the business but may not be transferable and it would be prohibitive for you to try to obtain the same licenses. In this case, you can complete a stock purchase but there are two things you need to do:
- Ensure that the sales agreement provides you with bulletproof indemnification by the seller for any potential liabilities that may have occurred during their ownership but only surface after you close the deal.
- You must have a significant amount of seller financing or a holdback in the deal so that you will have leverage to make a claim against the seller. Imagine if you don’t: you’ll be faced with defending the claim and having to go after the seller also in a separate claim.
Asset sales are the norm. It’s to your advantage.