HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS: “Asset Purchase vs Stock Purchase” – Part II
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.

Our last article dealt with the pros and cons of buying a business via a stock purchase. As you may recall, in general, a stock sale/purchase is more advantageous to the seller than it is to the buyer. This is primarily a result of the buyer “inheriting” known, unknown and contingent liabilities in a stock purchase.

Conversely, in general, an asset purchase is more favorable to a buyer than it is to a seller. Several of the advantages are as follows:

- Choice regarding assets purchased. A buyer does not have to purchase out of date equipment, obsolete inventory, or accounts receivable more than 90 days old. As the buyer gets to purchase the assets of his/her choosing, the buyer is not saddled with paying for non productive assets.

- The buyer can get a “step up” in basis. What this means is that a buyer can “upwardly” re-value specific assets carried on the books for a lower value; a buyer has a certain amount of latitude in this revaluation but there are limits and the revaluation must be reasonable and justified. An increase in depreciable assets can have particularly favorable financial and tax consequences to the buyer.

- In an asset purchase, the buyer is free of contingent liabilities. As mentioned above, this is one of the biggest disadvantages to a buyer involved in a stock purchase; but in an asset purchase, these liabilities remain with the company/seller – hence a big plus to the buyer.

- Union contracts and other benefit plans can be terminated or restructured in an asset purchase as the original contracts remain with the corporation.

- The state of incorporation can be changed to one which better favors the buyer’s specific circumstances.

Although there are many advantages to a buyer in an asset purchase, there are also some disadvantages. Some of these are as follows:

- Because of the negative tax implications to sellers resulting from an asset sale, sellers attempt to negotiate a higher sales price.

- The sale/purchase transaction may be more complicated due to transference of only specific assets (and sometimes specific liabilities). You may have to contend with purchase price adjustments, rent and utility adjustments, insurance transfers, benefit plan transfers, tax adjustments, license transfers, etc.

- Loan agreements, if existing, may not be assumable; would have to either into new agreements

- The tax/benefits attributes of the business (i.e., ordinary and capital loss “carry forwards”, accounting methods and accounting periods/years, employee benefit plans, etc may not be assumed/carried over.

- Loss of corporation’s insurance and other ratings (e.g., unemployment) – note that this varies from state to state.

- Loss of nontransferable rights or assets (e.g., patents, copyrights, etc).

As you can see, in general, the advantages of an asset purchase for the buyer outweigh the disadvantages. For a seller, it is more advantageous to dispose of the business via a stock sale (ref HBR Jan 05, Issue No. 2, “Sale Structure – Stock Sale – Pros and Cons”).

As always, see you next time in this same space for our next article where we will return to the Tutorial on Selling Your Business – from the seller’s perspective. 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.