If you want to acquire an existing business, you generally have two options: a stock purchase or an asset purchase. Each has advantages and disadvantages. In deciding how to proceed, you will need to consider the financial, tax, regulatory, and other business implications.
Asset Purchase: In an asset purchase, you acquire all of the existing business' property. You may also acquire some or all of its liabilities. In effect, an asset purchase means you acquire the business, not its legal entity. This means that all of the assets must be re-titled in your name or in the name of a new business entity you create.
Stock Purchase: A stock purchase means you acquire the legal entity that currently owns the seller's assets. Although we use the phrase “stock purchase,” not all of these types of transactions literally involve stock. Only corporations issue stock. You can also use a stock purchase to acquire a partnership or limited liability company—any legal entity that exists separately from its current owner. This means you cannot use a stock purchase to acquire a sole proprietorship; any transaction with such a person would, by definition, require an asset purchase.
Which Type is Better?
Whether you acquire a business through a stock purchase or asset purchase depends entirely on the circumstances of the deal. The following are some general issues to consider.
First, which type will be simpler? As noted above, with an asset purchase, you must re-title every piece of property owned by the seller. In a stock purchase, this is often unnecessary, as you are acquiring the legal entity that already owns the assets. On the other hand, a stock purchase requires you to comply with New York and federal securities laws. If the business has more than one shareholder or owner, minority investors may have certain rights. This can add time and expense to the deal.
Second, there is the issue of liabilities. In an asset purchase, you can specifically exclude the seller's debts from the deal. But in a stock purchase, you acquire all of the seller's known (and potentially unknown) liabilities.
Third, there are tax considerations. Asset purchases often favor buyers in this regard. This is because the purchase price paid for the assets forms the basis for future tax liability. In a stock purchase, assets are carried at their existing value, and may result in higher liability when sold later.
Conversely, stock purchases often favor sellers. The sale proceeds are taxed once at the capital-gains rate, and are not subject to double taxation as an asset purchase would (once on any gain from the sale, then again when proceeds are distributed to the individual sellers).
This is only a brief summary of the multiple issues buyers and sellers face when deciding how to proceed with an acquisition. Before entering into any such deal, you should work with an experienced New York business transaction lawyer. Contact our offices today with any questions you may have.