Asset vs. Stock Purchase: Pros and Cons When Buying A Business


by Nick Mesirow

AgreementIf you are buying an existing business that is set up as a C-corporation or S-corporation, you will need to determine whether you are going to make an “asset purchase,” which is when the buyer acquires the company’s assets (e.g. vehicles, equipment, and inventory), or a stock purchase, which is when the buyer purchases the company’s stock from its shareholders.

Asset purchases offer some distinct advantages over stock purchases:

  • When purchasing assets, the buyer is able to specify the liabilities it is willing to assume, while leaving others behind. In a stock purchase the buyer purchases stock in a company that may have unknown or uncertain liabilities – and they will assume, by default, those liabilities. Examples of uncertain liabilities include unemployment and payroll taxes that went unpaid under the previous owner’s tenure, fines for OSHA violations, and even future lawsuits.
  • If the purchase price exceeds the aggregate tax basis of the assets being acquired, the buyer receives a stepped-up basis in the assets equal to the purchase price. In these instances, the buyer will receive tax advantages, including acquiring the asset with full basis and new holding periods, and the accompanying benefit of depreciation deductions, which will reduce the buyer’s tax burden moving forward.
  • The buyer can further reduce their tax burden by expensing the cost of non-competition agreements and consulting fees paid to the previous owner, and by amortizing for amounts paid for goodwill, which can be done over a period of fifteen years.

That being said, asset purchase transactions present certain disadvantages to the buyer, for instance:

  • The selling company’s assets must be re-titled in the name of the buyer. This is not required in a stock transaction. While this isn’t process isn’t expensive, it is time consuming for the buyer.
  • In a stock purchase the buyer can normally obtain the selling company’s non-assignable contracts, permits, and licenses without the consent of the other party to the contract, permit, or license. That is not the case with asset purchases.
  • Asset purchases do not qualify for tax treatment as a tax-free reorganization.
  • If the selling company does not have a large number of shareholders, a stock transaction will normally be less complicated than an asset purchase transaction.
  • In states that impose sales or transfer taxes on the sale of assets, a stock transaction can avoid some or all of these taxes that apply to an asset transaction.

As you can see, there are several key advantages and disadvantages to asset and stock purchases. If you are contemplating purchasing an existing business, the attorneys at MMG can help you further understand the differences and answer any important questions you may have.