If you are considering acquiring an existing business, you will need to determine how to structure the transaction.
Under one method, you can buy the stock of the existing shareholders. An acquisition can also occur by purchasing all or most of the business’s assets.
When you purchase the stock of a business, you take over the entity’s operation as a going concern. The firm keeps all the assets and liabilities before the transfer. The shareholders recognize any gains or losses from the stock sale instead of the company. A buyer does not have any profit or loss until they sell the stock. You also have the advantage of a more simplified transaction with a stock purchase.
You can also acquire a business by buying the business assets. A buyer has more flexibility with the agreement terms when done as an asset purchase rather than a stock acquisition. The purchaser can pay cash to own the assets free and clear of all liens. Alternatively, a buyer may pay some money and assume certain liabilities associated with the assets.
Buyers usually have a tax advantage in an asset purchase. The buyer gets credit for the amount paid for the assets as a step up in basis for depreciation or amortization expense. Under a stock acquisition, the buyer is stuck with the seller’s basis in the assets.
The structure of your business acquisition has consequences for all parties, so you need to decide which method works best for you.