5 Tips Before Buying a Business


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 seller’s 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).

The Keys

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.

Additional articles on the topic:

You Too Can Execute a M&A Strategy

Grow Your Business Through the M&A Pipeline

Moving on Up Through Mergers and Acquisitions

Popping the Cork After a Successful Merger