Asset vs stock purchase

January 08, 2025

by a searcher from University of California, Berkeley - Haas School of Business in Oakland, CA, USA

I'm trying to understand the impact to wholesale customers of an asset vs stock purchase. It sounds like asset purchases are preferred for tax purposes but does that require that all existing agreements be re-signed to the new company? The business I'm looking at has hundreds of clients, including some cities, schools, etc, so the transition needs to be seamless to them in terms of who and how they send in payments (ie pay-to business name and bank accounts). Any thoughts would be much appreciated!

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Reply by a searcher
from University of California, Berkeley in Portland, OR, USA

Hi Carrie (fellow Haasie) I recently executed an asset purchase, and had this same concern to deal with. Bottom line is that you need to review the customer and vendor agreements to understand what the terms are around change of ownership. Some may just require a notification only, while others may require a whole new agreement.

Additionally, you mention changing payment processes and such, which definitely is another big hassle that I had to deal with, because we had to set up all new Quickbooks accounts, new bank accounts, new payment processing vendor accounts, etc. It took a ton of team resources to get all that set up, and several months.

I'm happy to talk more if you DM me.

Reply by an investor
from Harvard University in Tel Aviv-Yafo, Israel

If you're conducting a stock sale: Hold-back for Reps and Warranties: Ensure you retain enough of a hold-back to cover representations and warranties, as your legal exposure is significantly greater in a stock sale. You are liable for the company's actions that occurred prior to your purchase, so it's crucial to mitigate this risk. Tax Depreciation Considerations: Depending on the nature of the business, there may be strategies to still benefit from some of the tax depreciation advantages typically associated with an asset sale. Goodwill Allocation: For asset-light businesses, where much of the value is tied to goodwill, it’s sometimes possible to argue that part of the goodwill belongs directly to the owner rather than the business. This is particularly relevant for relationship-driven businesses. When structuring the purchase, you might allocate a portion of the goodwill to the business and another portion directly to the owner. In effect, you’re acquiring both the business and the owner’s goodwill. While this approach won’t address the legal liability inherent in a stock sale, it can help with the depreciation issue. Special Considerations for C-Corps: This method has been used in scenarios involving the purchase of assets from a C-corp to help the seller avoid double taxation. However, it’s less commonly applied in stock sale situations. That said, it may still be worth exploring with your tax advisor or legal counsel.

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