The first step in buying a business is actually establishing what exactly it is that you are buying. A business acquisition is not as simple as running down to the general store, picking out the company you like, and swiping your credit card. There are numerous complex details that must be addressed with regard to how the transaction will be carried out.
There are two ways in which you can go about purchasing a business. You can execute a stock purchase or an asset purchase depending on what aspects of the business you actually want to buy.
We’ve outlined some details about the two possibilities below:
A stock purchase is when the buyer only purchases a shareholder’s ownership stake in a business entity. He or she will directly buy the shareholder’s stock. Obviously, this is only an option for companies that actually have stock, so this type of business sale is usually reserved for larger corporations—not sole proprietorships, partnerships, or LLCs.
In purchasing the stock, the buyer will actually take over ownership of an existing company. However, this tends to be a more advantageous arrangement for the seller than the buyer. It allows the seller to walk away from the business and generally releases him or her from any obligations or liabilities incurred by the company (but not always). It also involves more favorable tax treatment with regard to capital gains for the seller.
On the other hand, the buyer benefits from what is generally a simpler transition compared to an asset purchase. Firstly, it can be much easier to maintain contracts such as real estate leases or the company’s copyrights. Additionally, since the assets of the company are owned by the business entity, none of them will have to be retitled or signed over to the buyer. By taking control of the business entity through a stock purchase, the buyer thereby controls the company’s assets—although the buyer does shoulder more risk by also taking control of the company’s liabilities.
Conversely, an asset sale involves a buyer purchasing individual assets from a company, while the seller maintains ownership over the business entity itself. There is a nearly endless list of assets that a buyer could potentially purchase, such as equipment, real estate, inventory, client lists, accounts receivable, licenses, trade secrets, or even goodwill. This arrangement is generally preferable for buyers because it is easier to avoid inheriting liabilities and debts from the selling company. The tax treatment also tends to be more favorable for buyers in this type of transaction. However, unlike a stock purchase, the transfer of assets can be very complex since many of those assets will have to be re-titled and signed over to the buyer.
From the seller’s perspective, an asset purchase will actually be much less favorable with regard to taxes because many hard assets will be taxed at the higher income tax rate rather than the capital gains rate. However, the sale will not be required to comply with complex securities regulations since no stock will be involved.
Every business transaction involves unique circumstances that will impact the type of sale you should pursue. It is vital that you enlist the experienced guidance and counsel of a knowledgeable business attorney who will help you structure any transaction in a manner which most benefits your needs and goals. If you are interested in purchasing a business, please contact the Trembly Law Firm today.