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 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.

Reply by a professional
from Georgetown University in San Diego, CA, USA

Hi redacted‌, what you're describing is one of the instances where an equity purchase might make sense, especially if you are worried about changing payment accounts (because assigning them is slow and/or difficult). redacted‌ basically nails it--many commercial contracts include a provision prohibiting assignment (which would be required in an asset purchase), but a provision requiring consent or notice of a "change of control" (new owner of a controlling stake of the equity of the business) is much less common. You are taking on more risk by buying the entity itself, but you can at least treat the deal as a purchase of assets for tax purposes with a tax election (include this in your LOI). The exact election will differ depending on the entity structure of the target and buyer. Happy to discuss if helpful - redacted

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