HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS: “Asset Purchase vs Stock Purchase” – Part I
By Ralph Fain

Ralph Fain is a principal in the R/ Fain Group, a professional business brokerage firm which confidentially represents the interests of sellers/ buyers of “Mainstreet to Mid Market” companies (revenues from $1MM to $25MM). Mr. Fain has over 20 years of broad business experience with Fortune 500 companies as well as with small/medium sized companies and has served in various capacities including Controller, Vice President, and President/CEO. Each week he will provide comprehensive information on the many aspects of buying/selling businesses.

Recently we wrote about the pros and cons of selling a business via an asset sale or stock sale from a seller’s perspective. Although we are not quite finished with our Tutorial on Selling Your Business, because of that aforementioned recent article, this is an opportune time to take a break from the Selling/Seller’s Perspective and look at transactions through the eyes of a buyer.

Accordingly, in the next two articles we are going to cover the advantages and disadvantages, to a buyer, of purchasing a business either via asset purchase or via stock purchase. As you may recall from the earlier articles, an asset purchase is when a buyer purchases all or a portion of the assets of a business (e.g., inventory, fixed assets, etc) whereas a stock purchase is the purchase of the ownership shares/rights of the corporation – all assets and all liabilities of the corporation are retained by the corporation and only a change in corporate ownership has occurred. Note that you cannot have a stock sale with a business organized/conducted as a sole proprietorship – a sole proprietorship can only be sold via an asset sale.
In general, it is more advantageous to a buyer to purchase a business/company via an asset purchase than via a stock purchase. The primary reason for this is when the capital stock of a corporation is purchased, everything “comes over “ to the new owner – that is, the corporation remains just as it was prior to the sale, but now it has a new owner. Not only has the new owner purchased a company with assets, he has also purchased a corporation with liabilities – known, unknown and perhaps undisclosed.
This is one of the primary disadvantages to a buyer of a corporation acquired via a stock transaction – the inheritance of liabilities (known, unknown, and/or contingent). Other buyer disadvantages of a stock purchase are

- No “step-up” in the tax basis of the company’s assets. The value on the books is the value at which the new owner gets them. Ideally, you would like to have a higher asset value (particularly for depreciable assets) as this has certain financial and tax advantages (increasing the value of the assets can be accomplished via an asset purchase and we will cover that in our next article).
- An additional disadvantage is that union and benefit plans will continue “as is” as these agreements are with the corporation; in many cases the duties and responsibilities under these plans could be onerous.
- Another not so favorable effect is that, if 100% of the company was not purchased, you could have minority shareholder issues if you and the minority shareholder(s) don’t see eye to eye regarding management style and philosophy, financial policies, compensation issues, etc.
- One potential drawback to a stock purchase is that the state of incorporation remains the same. This could have negative legal, financial and tax implications.

Although it is my opinion that a stock sale favors the seller, there are some advantages to a buyer who purchases the stock of a corporation – some of these are
- Retention of the right to the corporate name; this could be significant if the company has favorable name recognition and a good reputation.
- Retention of the right to Workers Compensation and other ratings (e.g., unemployment). This varies from state to state but, if the ratings are assumable, it could be favorable if the ratings are good (could also be negative if ratings are not good).
- A favorable debt structure, if in existence, may be able to be obtained.
- Corporation keeps its non transferable rights – patents, copyrights, etc.
- The seller’s tax attributes go with the corporation.

As you can readily discern, although there are some advantages to a buyer, in general, a stock purchase favors the seller and not the buyer – particularly due to the inheritance of liabilities and also due to not being able to “step up” the basis of the assets. Our next article addresses an asset purchase in which the buyer has more advantages than the seller. As always, see you next time in this same space for our next article – the pros and cons of buying a business via an “asset” sale. As always, should you have any questions or require additional information please feel free to contact the R/ Fain Group at 832-646-0832 or via our web site.

To learn more about Ralph Fain, Tune into CNN 650 Sunday at noon.