The purchase or sale of a business is fraught with decisions that could mean the success or failure of the enterprise’s future. One of these critical choices is whether to purchase the business’s assets or its stock. It is crucial to understand which decision is suitable for the transaction in question.
The pros and cons of asset or stock purchases
Each purchase type has its benefits and its drawbacks. These are the pros and cons to consider:
- Asset purchase: In an asset purchase, the buyer obtains the company’s business assets. These could include equipment, inventory, facilities and company vehicles. The purchase of LLCs, partnerships or sole proprietorships must be asset purchases, as these entities do not have stock options.
- Pros: Buyers can select which liabilities to purchase. Doing so avoids disputes with shareholders who do not want to sell.
- Cons: Must re-title the company’s assets. This does not qualify as tax-free reorganization.
- Stock purchase: Stock purchases involve the purchase of the company’s stock, but not of its physical assets. If a business has incorporated, then a stock purchase is an option.
- Pros: Buyer does not have to re-title assets. Buyer can obtain the company’s contracts, permits and licenses. This can qualify as a tax-free reorganization.
- Cons: Buyer must purchase all liabilities. This is more complex and more regulated than asset purchases.
The buyer and seller must carefully weigh the pros and cons of an asset or stock sale, then agree on how to structure the transaction.
Determining the type of purchase
For a business to succeed, its owner and shareholders must comply with the law while also maximizing their bottom line. In any sale or purchase, it is wise for each party to retain counsel to advocate for their best interests and help them navigate the law. A business attorney can provide additional counsel regarding the purchase of business assets or stocks.