Buying a Business; Do I buy assets or stock?

In light of the current economic times, many Minnesota business owners are implementing succession plans to pass on their business to related and unrelated purchasers.  As part of the transaction of the sale of the business,  the parties are faced with the decision of how to structure the sale.  The transaction can be structured as a STOCK purchase, an ASSET purchase or a MERGER.   There are tax and non-tax reasons for the choice that is ultimately made.  The buyer may drive the decision because they are only willing to purchase upon certain terms or the seller may only be offering to sell under one of the three scenarios of stock purchase, asset purchase or merger.  

From a tax perspective, the IRS will look to whether the transaction is a “reorganization” which is tax free if qualified, or whether it is not such a reorganization which makes the sale a taxable event. 

Buyers tend to like asset purchases while sellers tend to like stock purchase because of the tax and non-tax results. 

With a stock purchase the purchaser is buying all the responsibilities, obligations and liabilities of the company.  They are buying the entity itself.  So the seller gets to “walk-away” from the business without any of those otherwise lingering responsibilities.  The seller will recognize a gain or loss based on the difference between the sales price and his current stock basis.  If an asset purchase, the buyers gets to pick and choose which assets it wants to purchase.  This of course can get a little tricky if those assets serve as security for a debt on the asset or other debt.  If the seller has depreciated those assets on their taxes, there will be a taxable gain realized by the seller from the sale of the depreciate asset. Furthermore, a seller dislikes an asset sale because it will likely face double taxation; once upon receipt of the proceeds from the sale of the asset at the entity level and then again when then upon distribution to shareholders. 

It is critical as the seller and the buyer to be well aware of the tax and non-tax pros and cons to the way the deal is structured. If you have a business broker involved in your transaction, don’t rely on that broker to properly structure the transaction.  The primary role of the business broker is to match up a buyer and seller and make sure the transaction closes; after all, the broker doesn’t get paid unless a transaction closes.   A business broker can NOT give legal or tax advice and they should not be relied upon by the seller or buyer of a business to do so.  It is critical to seek legal and accounting advice very early on in the transaction.  Ideally, a seller of a business would contact the legal and accounting professional before any letter of intent or purchase agreement is signed.