Asset Sale or Stock Purchase? It Makes a Difference

So you’re selling your business, or you’re buying one. But what is actually being bought or sold? Before you just say “the business,” you should be aware that there are two main ways that businesses are bought or sold, and they can have significant legal ramifications and differences.

You can buy or sell a business, by selling all of the stock of the business to someone else. You can also just sell the assets of the business to someone else.

The Stock Sale

With a stock sale, none of the property of the business itself is ever transferred; nobody is buying the intellectual property, the machinery, the customer lists, or all of the other things owned by and associated with the business. Rather, only the owner’s interest in the business is being purchased by the buyer, so the old owners are gone, replaced by the new owners (the buyers).

After the sale and purchase of the shares are done, the business keeps running (under the ownership of the buyers), and the sellers are thereafter unassociated with and have no interest in the business that they once owned.

This is easier than an asset sale. No transfer of any title is needed, and there is no issue over what is being purchased and what isn’t—the entire business goes about its business, just with the new owners in charge.

One risk of a stock sale is that you aren’t just purchasing the good, valuable stuff: you’re also potentially purchasing the liabilities, debts, or claims, against the business. Sure, the new owners won’t be personally liable, but the business will be, and thus, you could be purchasing a business saddled with liabilities from day one.

The Asset Sale

An asset sale is different. With an asset sale, the buyer has its own already-existing business entity, and the seller transfers ownership of the property of the seller’s business, to the buyer’s business. The seller technically still owns the shares of the business, but they’re worth nothing and the business owns nothing—all of what the business had, has been purchased by and transferred to, the buyer.

This can avoid liabilities that the old (seller’s) business has, as the old business is still, technically, a business, and a separate one from the one that the assets were transferred into (the buyer’s business).

Other Considerations

Even if you do opt for an asset purchase as opposed to a stock sale, you should still address in the purchase agreement, who will be liable for claims and liabilities—including those that may arise after the sale, but which were incurred before the sale.

There also may be tax ramifications especially when it comes to the purchase or sale of stock. Taxes may influence which route you want to go with the purchase or sale of a business.

What’s the best way to start or buy your new business?  Call the West Palm Beach commercial litigation attorneys at Pike & Lustig today.

Sources:

investopedia.com/terms/a/asset-sales.asp

marinercapitaladvisors.com/resources/asset-sale-vs-stock-sale-whats-the-difference/