Buy a business
Asset purchase or stock purchase: what is the difference for a buyer?
Short answer
In an asset purchase you buy the business's assets, like equipment, inventory, the name and customer relationships, but not the seller's company, so most past debts and liabilities stay with the seller. In a stock purchase you buy the company itself, including its history. Most small business buyers prefer asset purchases; sellers sometimes prefer stock sales for tax reasons. Your lawyer and CPA should weigh in.
How to, at a glance
- Ask whether the deal is an asset or stock sale
- In an asset sale, list exactly which assets you get
- In a stock sale, check the company's debts, taxes and lawsuits
- Have your CPA review how the price is allocated
- Have your lawyer draft protections in the purchase agreement
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- Which do sellers prefer?
- Sellers often prefer stock sales, which can be taxed more favorably for them and leave nothing behind. That is a point to negotiate.
- Does an asset purchase protect me from everything?
- Not everything. Some taxes and obligations can follow the assets depending on state law. Your lawyer will know what applies.
- Do I need a new company to buy the assets?
- Most buyers form their own company to hold the business. Ask your lawyer and CPA which type fits you.
Side by side
| Asset purchase | Stock purchase | |
|---|---|---|
| What you buy | Equipment, inventory, name, goodwill | The company itself |
| Past debts and liabilities | Mostly stay with the seller | Come with the company |
| Contracts and licenses | Often must be reassigned or reissued | Usually stay in place |
| Common in small deals | Yes, most of them | Less common |
Why buyers usually prefer asset purchases
- You leave behind most of the old company's debts and legal history.
- The price is split among the assets, which can give you tax deductions over time. Both sides report that split to the IRS on Form 8594.
When a stock purchase makes sense
When contracts, licenses or a franchise cannot easily be transferred, buying the company can be simpler. Then due diligence on taxes, debts and lawsuits matters much more, and your purchase agreement should include strong protections.
Sources
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