BUYING AN EXISTING BUSINESS – STOCK OR ASSET PURCHASE

When considering the purchase of an existing business and that business is a corporation, you have to determine whether you want to purchase the stock of the business or its assets. Sellers like to sell stock. The main reason is that the Seller can leave the liabilities (including pending litigation) and obligations of the business to the Buyer. The Buyer generally assumes Seller’s liabilities and obligations (although contractual provisions can provide protection if the Seller is not judgment-proof). Most contracts owned by the business continue in effect (although some of the contracts may require the seller to obtain consent prior to a change of ownership). The business goes on as before; the ownership change is relatively seamless. The seller also benefits from being taxed on its income from the sale at a lower capital gains tax rate.

Buyers, on the hand, usually prefer an asset sale for a variety of reasons, including the tax benefits (getting a stepped-up basis in the assets acquired, which reduces income tax to the Buyer on a future sale of the purchased asset). Another reason is that the Buyer is in a position to choose which assets and liabilities to purchase, thereby avoiding the purchase of liabilities such as pending litigation, etc. Note, however, that a Buyer may decide on a stock purchase specifically because it wants to automatically become a party to certain contracts the Seller has without having to re-negotiate (e.g. a lease).

Understanding the full impact of your decision to buy the stock or assets of a company is essential to structuring the acquisition of a corporation.