Asset vs stock purchase

searcher profile

February 17, 2024

by a searcher from University of Washington in Seattle, WA, USA

What are the pros and cons of an asset sale vs stock sale? And in what situation would you consider one over the other?

From what I have gathered, asset sales seem better suited for bolt ons and anything with questionable due diligence. Outside of that it seems like a stock sale provides multitudes of benefits as long as the business has had a clean history/reputation.

In hindsight do you have any regrets doing one vs the other?

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I find it is hard to go into business purchases with one transaction method in mind. I think you have to be flexible based on the type of business you are purchasing. Although I would agree with the above comments that most buyers prefer an asset purchase versus a stock purchase for a number of reasons including avoiding potential unknown liabilities, in some cases an asset purchase just is not possible. If the company you are buying has customer contracts or agreements or specialty vendor agreements that are non-transferable, sometimes you are almost forced to do the transaction as a stock purchase to protect those contracts.

There is a way to do a modified stock purchase where it acts like an asset purchase from an accounting perspective, but you would need to talk to your accountant and tax attorney about how to make that happen. As always I would include all of your advisors in the decision for each company you look at and be sure you are considering all factors. Again, you need to be open to doing either option as what is required could vary depending on the company you are purchasing. Good luck and if you have any additional questions please reach out.
commentor profile
Reply by a professional
in Janesville, WI, USA
Asset sale is going to be best for you from a tax perspective. You get a step up in basis for the assets purchased and get to amortize goodwill over 15 years. This creates a huge tax shield. However, the seller benefits more from a stock sale as they will be taxed at the more preferential capital gains rate.

One downside in the asset sale is that you now have a totally new EIN and therefore everything has to be changed to that new EIN (payroll, bank accounts, sales tax, contracts, etc...). You are also starting over with no credit history. In a stock sale this is not the case but you do bring along the liabilities of the entity. This would not be the case in an asset sale.

There are options to structure the purchase as a stock sale taxed as an asset sale. One example of this in the case of buying an s-corp is an F reorg. I recently wrote an article on it and you can read that here. https://midwest.cpa/resources/what-is-an-f-reorganization/
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