Warren Buffett famously said: “Be fearful when others are greedy, and greedy when others are fearful.” With inflation, declining GDP growth and volatile markets, there’s a lot of fear out there right now. And that means there are entrepreneurs and investors who are heeding Buffett’s advice and looking for “buy low, sell high” opportunities to expand their businesses through acquisitions.
When buying a business, the purchaser has an option: to structure a transaction as either an asset acquisition or a stock sale. Let’s dig into the important distinctions between the two types of transactions, and why an asset purchase is the right option for many purchasers.
What is a Stock Sale?
The sale of a business as a going concern to a new owner is done via a stock sale. In a stock sale, the purchaser buys the stock of the company and assumes all assets and liabilities. In short, the stock sale purchaser steps into the shoes of the prior owner(s).
What is an Asset Sale?
In an asset sale, the business’ assets, such as equipment, property, customer lists, and goodwill is sold. The purchaser then uses the assets for an existing business or operates under a new entity using the purchased assets. The purchaser does not assume the liabilities of the seller unless specifically agreed upon.
Reasons to Structure a Transaction as an Asset Sale
There are a number of advantages of an asset sale transaction. Some of the most important include:
The Potential Cons of an Asset Sale
While there are a number of important advantages to an asset sale, there are some drawbacks.
For example, to the extent that a buyer wants to continue doing business with a customer or supplier of the seller, it will have to renegotiate the terms because only the assets (not the legal entity) is being transferred. Also, when only the assets are purchased, those assets must be re-titled in the name of the buyer, which can be a time-consuming process.
Which is the Right Approach for You?
There are a number of critical factors that go into determining the right way to structure a transaction. There are advantages and disadvantages to buying a business through either an asset or stock purchase. Both methods can work well, but it depends on the parties’ objectives and the deal’s circumstances.
That’s why it’s important to think through the right approach with an experienced business attorney. To discuss your objectives, and further understand the pros and cons of each approach, please contact Zana Tomich.
The business and employment attorneys of Dalton & Tomich take your business just as seriously as you do. Attorneys Zana Tomich and Noel Sterett are trusted by closely held family businesses and others across Michigan and Northern Illinois as invaluable partners and counselors. We guarantee all your calls and emails will be returned within one business day so you can focus on what you do best: running your business.
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