- posted: Feb. 15, 2022
- Business Law
In the small business arena, companies are usually bought and sold in one of two ways: by stock purchase or by asset purchase. In a stock purchase, the buyer assumes ownership of the target company, acquiring all its property and taking on its debts and liabilities. In an asset purchase, only specified property is transferred and the target company continues to exist. Each method has advantages and disadvantages for both the buyer and the seller. If you’re planning to buy an existing business, your choice of method will depend on the purpose of the acquisition, the financial health of the acquired business and other relevant circumstances.
The foremost advantage of a stock purchase is that it promotes continuity of the acquired business. This method makes sense when the business is running well and there are valuable intangible assets like a trade name and goodwill that you want to preserve. All of the existing customer contracts, vendor agreements, debt obligations and employment agreements can likely continue without interruption.
However, stock purchases have inherent risks, since the buyer takes on all of the target company’s actual and potential liabilities. The buyer is responsible for paying off any outstanding loans, including mortgages and finance agreements. If, after the closing of the stock sale, the company is sued over something that happened previously, the new owners must defend against the suit and may have to pay damages and other costs. It is up to the prospective buyer to conduct a thorough examination of the target company’s books and operations. This is called “due diligence” and it takes significant time, money and effort.
An asset purchase can be of greater benefit for a buyer that only wishes to take over selected property without concern for keeping up the target company’s operations. It is also less risky. The purchaser takes over only the debts and obligations that are associated with specific assets purchased or that are voluntarily assumed, such as leases or contracts. This can greatly lessen the buyer’s need for due diligence and reduce its costs. There is also a tax advantage. The buyer acquires the assets on a cost basis and can immediately begin taking depreciation deductions, thereby lowering income tax.
One disadvantage of an asset purchase is that not all assets of the target company can be easily transferred. Even if customer and vendor lists are made part of the sale, contracts with vendors and customers may have to be revised or even renegotiated entirely.
Before purchasing a business, you should seek the advice of a qualified acquisitions attorney for help in deciding which method is right for your situation.
Hemmer DeFrank Wessels, PLLC is a full service business law firm based in Fort Mitchell, Kentucky. Our experienced attorneys provide guidance in all aspects of business mergers and acquisitions. Feel free to contact us online or call [ln::phone] for a phone consultation.