OWM Blog – Stock v. Asset Sale When Buying or Selling a Business

When buying or selling a business, buyers and sellers have a choice: the transaction can be structured as either a purchase and sale of assets, or a purchase and sale of stock. Where the transaction is structured as a stock purchase, transfer of the ownership of the business entity itself results, and thus the entity continues to own the same assets and have the same liabilities as before. Where the transaction is structured as an asset purchase, the purchaser buys individual assets of the business, such as equipment, inventory, and goodwill, and the business entity itself continues to be owned by the same owner, often with dissolution occurring soon thereafter. The purchaser and seller may have various reasons for preferring one type of transaction over the other.

With regard to a stock purchase, the purchaser buys the stock of a business entity, and takes the entity as the purchaser finds it, both with respect to assets and liabilities. Contracts that the entity are a party to transfer automatically to the new owner, and, thus, the stock purchase is more straightforward. However, the purchaser does not have the advantage of “handpicking” assets and liabilities such that exists with regard to an asset purchase. Additionally, exposure to unknown liabilities exists, and the purchaser typically is compelled to retain all employees of the business.

With regard to an asset purchase, the purchaser can essentially “handpick” assets to be purchased, although the seller’s cash is typically not an asset that is sold; additionally, the seller typically retains any long-terms debt obligations. Nonetheless, the purchaser in an asset sale is typically an entity itself, for purposes of limiting liability. In an asset purchase, as contrasted with a stock purchase, contracts may need to be re-negotiated, and assets may need to be retitled. As a result, an asset purchase is typically more complex than is a stock purchase.

Lastly, but beyond the scope of this article, there are important tax ramifications relating to a stock purchase versus an asset purchase. For this reason, readers are encouraged to consult with their tax advisors in addition to their legal counsel when buying or selling a business.

If you have any questions or would like to discuss the above in detail, please call me at (610) 323-2800 or email me at jkkoury@owmlaw.com. Also, please watch OWM’s September 2018 Legal Talk program regarding Stock v. Asset Sale When Buying or Selling a Business on our website here.

DISCLAIMER: The contents of this blog are not legal advice, and are not to be used for that purpose. If you are faced with a legal matter, you should contact a lawyer immediately in order to ensure that you are protected.