5. Stock Purchase or Asset Purchase?
Both purchase types have tax implications, but often overlooked are the legal ramifications of choosing either a stock or asset purchase. With a stock purchase of company, the entire business is included in the sale including any liabilities linked to the business. Of course, the process is much simpler reduces the amount of review necessary to carry out the transaction.
An asset purchase, however, is much like purchasing a car from another business. The transfer of ownership only includes the assets listed in the Asset Purchase Agreement. The election to use an Asset Purchase Agreement may be the preferred option considering some businesses may have either significant debts and/or liabilities the buyer does not wish to assume as would be the case under a traditional stock purchase agreement.
Of course with an asset purchase agreement, it is also imperative to determine what involvement the seller will have in the industry following the consummation of an asset purchase agreement presuming the buyer plans to use the newly purchased assets in the sellers industry.
Will the seller still be an active participant? If so, will it be limited by scope or geographical location?
Because of the additional diligence necessary, an asset purchase agreement must be carefully prepared to avoid certain assets being left off (or included), liability being included with the asset purchase, and seller(s) being restricted (if applicable).
Buying a business can be an exciting time. It could mean the opportunity for expansion and the ability to service clients in new and different ways. However, with such an investment comes the responsibility to ensure the transaction does not backfire. Therefore, make sure all the necessary due diligence is performed and, of course, have your team of advisors (i.e. accountant, attorney, banker, etc.) ready to assist you throughout the process.
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About the author
Senen Garcia operates SG Law Group LLP a thriving law practice in multiple states assisting clients with their corporate, real estate, estate planning, and property insurance claim needs. Additionally, Mr. Garcia has accounting practice assisting small businesses with tax and accounting needs. Along with his work with SCORE, Mr. Garcia has also provided assistance with the local Small Claims Clinic that provides assistance to individuals filing small claims cases. Mr. Garcia has spoken on a variety of topics such as: How to start a business, Communication within your organization, Importance of Capital Accounts, What’s in Business Name Anyway?, and Stock Purchase Agreements vs. Asset Purchase Agreements.Website