When you buy a business, you have a choice, should you buy the assets of the business or buy the legal entity, typically a corporation? In most sales, it is better for the buyer to buy the assets. Here are the reasons why.
- Liabilities - If you buy the corporation, you are assuming any legal liabilities that the corporation has, or will have, based on actions taken before you bought the business. Here are some of these. Liability for unpaid income taxes can go back seven years. Another liability can be a workmen comp claim or additional insurance premiums due. Other potential claims are human relations related, such as a claim of discrimination or sexual harassment. Or, product liability claims from customers can arise after the sale. Some of these concerns can be mitigated by a seller staying personally liable for them after the sale.
- Taxes - If you buy a profitable business, you are likely to pay something for goodwill. This is the excess of the sale price over the value of the other assets purchased. If you do an asset purchase, you can amortize the goodwill over 15 years. That means that you can deduct 1/15 from your taxable income each year for 15 years. That is a lot of money in most sales. It isn’t complicated, but you should get advice from a tax adviser on how to structure the purchase to take advantage of this.
- Depreciation – In a stock sale, you are assuming the seller’s balance sheet. Owner’s usually write off – depreciate – hard assets, such as furniture, fixtures, equipment, and vehicles as quickly as possible for tax purposes. As a result, the value of the assets on the balance sheet is likely to be lower than the market value. In an asset sale, the price paid for the hard assets are the current market value – what they could be sold for in an orderly liquidation. This is usually higher than the value on the balance sheet. The benefit of this is that the depreciation period is shorter than the 15 years that goodwill is written off.
There are situations where, despite some of these issues, a stock sale is done. One such situation could be where the business has a number of non-assumable contracts with customers. A buyer may prefer to buy the corporation rather than ask each customer for a new contract. Another situation could be where it is easier to transfer licenses or permits if a stock sale is done. Another situation can be where the corporation is a “C” corporation and the taxes for the seller will be lower in a stock sale. This blog explains the benefits of an asset purchase to a buyer, but an attorney and accountant should be consulted to decide whether to do an asset sale or stock sale.