Acquisition Entrepreneur: Stock or Asset Transaction?

A Tale of Two Acquisition Entrepreneurs

When it comes to buying a business, the structure of the sale can have significant impacts on you, the buyer. Most small businesses are structured as either a stock sale or an asset sale. 

Stock Transaction:

In a stock transaction, the buyer purchases the selling shareholders' stock directly, acquiring the company lock, stock, and two smoking barrels – as in you’re getting all of the assets, liabilities and operations of the business. The legal entity isn’t changed, just the ownership. Typically, this makes transferring agreements, licenses, and permits a lot easier. But don’t forget this includes those pesky hidden liabilities too. Most sellers will prefer a stock sale because the proceeds are taxed at a lower rate compared to an asset sale. 

Asset Purchase Transaction:

In an asset purchase, the buyer gets the assets and liabilities of the business they choose and agree to purchase. This could be physical assets like inventory and equipment, or intangible assets like customer lists and intellectual property (IP). My e-commerce business was a limited liability company, but the buyer purchased only my “brand’; the IP I’d created like the trademark, the logo, and of course my customer list. The buyer avoided inheriting the risk of any liabilities my company had. However, an asset sale can be a real pain in the ass when it comes to reassigning leases, contracts, permits, and licenses. These usually get renegotiated or transferred under new terms; and those are not always favorable to the buyer. But a lot of buyers prefer asset purchase because they can get a step-up in basis for assets which enhances future tax deductions. And taxes are the reason most sellers are less enthusiastic about asset sales – they stand a chance of being taxed at higher ordinary income rates, especially if a significant portion of the asset sale is allocated to inventory. 

A Tale of Two ETAs.

Both of our examples come from recent Acquiring Minds podcast interviews. In our first example, Russ Hadlock did an asset purchase for an auto glass company and wound up having his monthly lease doubled! But there was more, like higher insurance rates and having to reapply to the Safelite system. In our second example, Chad Fondriest did a stock purchase of an e-commerce business and benefited from pricing and terms from suppliers that were favorable because the business he purchased had been around for a while. When it came to a stock purchase, Chad noted “...another real value that never occurred to me in buying an existing business is those vendor relationships and payment terms…that I wouldn’t have gotten as a startup…”

Disclaimer:

The stuff I write about is for general information purposes only and shouldn’t be considered financial, legal, or tax advice. Each business is unique and the implications of the type of sale can vary on a wide range of factors. Seek out a qualified attorney or Certified Public Accountant (CPA) who can provide tailored advice for your specific situation. You should never rely solely on general information when making critical business decisions. Do your own due diligence!