Pros & Cons of an Asset or Stock Sale
There are commonly two frameworks for buying or selling a business. While I personally have a preference, the method chosen always remains the decision of the parties involved.
THE ASSET PURCHASE
An asset purchase involves acquiring specific ASSETS of a business. These assets include equipment, inventory, customer lists, electronics, the social media accounts and website and domain name, phone numbers, and intellectual property. Assets generally do not include cash, accounts receivable (in smaller companies) and the Seller's personal property. To the benefit of the buyer in an asset sale, all liabilities remain with the seller. In most cases, a lease is assumable and the Buyer works directly with the landlord to continue or renew the lease.
The Buyer DOES NOT acquire the holding company, tax ID, or history of the business. The seller's entity fails to exist and a new one acquires the assets - not the "corporation.
In other words, the Buyer purchases most of the business assets under a new corporation or LLC. The trade name of the business can be transferred tot he new corporation as a "doing business as" name.
PROS OF THE ASSET SALE
LIMITS YOUR LIABILITY: By not acquiring the company itself, the buyer is not acquiring the liabilities associated with the business. The Buyer is not responsible for past debts, legal issues, unpaid taxes, environmental problems, or employee issues and claims agains the company.
ASSET SELECTION: The buyer may elect to not purchase all asset. For example, a Buyer may/may not want to purchase the real estate listed with the business sale, or only purchase the newer equipment with a plan to replace outdated items.
MORE ACCURATE VALUE: While the Goodwill of the business may be determined by several valuation methodology or historic comps, other assets and equipment are fairly easy to value using present market values.
TAX BENEFIT: One word: DEPRECIATION! Your CPA or accountant can assist the Buyer setting up their depreciation schedule. These annual "deduction" reduce profits thusly reducing tax on net profits.
LIMITATIONS OF AN ASSET SALE
RISK OF ABSENCE OF HISTORICAL FINANCIALS: Some Sellers are hesitant to share past financials. Look at this as a red flag. When working with a Business Broker, they will guide you through due diligence and requesting supporting tax returns and financials to prove the business performance is as the Seller promotes it. Should the buyer raise funds through a bank or SBA loan, the bank will also require several years of TRs and financials. While your company starts on closing day, you can negotiate with the seller to receive a copy of the current year's tax return.
MITIGATE: Request Seller sign an IRS form at closing that allows the Buyer to receive a transcript of the tax return at a later date directly from the IRS.
POTENTIAL LEGAL ISSUES: Legal issues may arise with the transfer of ownership of specific assets. For example, a lien on equipment securing a bank loan was not properly paid off or released by the Creditor after the sale.
MITIGATE: A Business Broker will introduce you to a closing attorney who will
perform lien and title searches, surfacing issues that exist and listing debts that must be paid off at closing.
THE STOCK PURCHASE
In a stock purchase the Buyer acquires ownership by purchasing all shares or stock of the company from the Seller(s). The Buyer acquires ownership of the existing entity and the assets and liabilities associated with it. All shareholders must agree to sell their shares.
THE PROS OF A STOCK SALE
SIMPLICITY: The buyer is acquiring ownership of the company AS IS and not individual assets.
ACCESS TO COMPANY HISTORY: History includes access to the entire history of records and financials, can maintain licensing, assume debt, and assume services e.g. payroll, rentals, leases.
EASY TRANSFER: The purchase of the company as an entity transfer of ownership is typically easier and quicker. A good example is a trucking comany: the new owner can maintain existing DOT licenses and registrations.
THE LIMITATIONS OF A STOCK SALE
ACCOUNTING FOR ASSET and LIABILITIES: Because the Buyer acquires all assets and liabilities associated with the business, post-sale revelations may include aged equipment, outdated inventory, and higher debt than originally detailed.
MITIGATE: A Business Broker will guide the Buyer through an extensive due diligence for committing tho close on the commitment to purchase. Additionally, a title and lien search also uncovers the unknown. Lastly, if needed, bring in a third party appraiser or due diligence CPA to value and inspect the assets, liabilities, contracts, payroll, tax status, and cash flow.
LEGAL ISSUES: Much more of an issues than an Asset Sale, the Buyer inherits ALL of the company's history included employee claims, legal battles, future claims on past performance or trademark or patent infringement. The buyer "owns" ALL of the company and its historic performance. Buyer beware.
TAX EXPERTISE: Stock sales come with complex tax issues. Always seek the help of an accounting professional.
In summary, it is our recommendation is to pursue an Asset Sale for all small to mid-market business sales or purchases. Two advantages: work with a knowledgeable Business Broker and, if choosing to do so, work with a reputable SBA lender. Bot advisors will be advocates for surfacing benefits and concerns of the target business. No matter how much you like a company, listen to your partners for possible red flags.
Stocks sale are best reserved for larger companies and M&A acquisitions.
Lastly, always have an accountant, business attorney and a tax specialist ready before you start your search. And, remember to engage 1st & Main Partners to streamline the buying or selling process.
SOURCE: this blog entry was prompted by a bizbuyercentral.com article.