For anyone contemplating the purchase of an existing business, you should understand sooner than later that the transaction will take on one of two possible forms – the acquisition will either be an asset purchase or stock purchase. Both are very different. Each has its own benefits, and each has its own drawbacks. The question is, which is right for you? The answer to that question begins with you developing a thorough understanding of each, and then consulting with counsel to help determine which makes the most sense.

What is an Asset Purchase?

Just as the name implies, an asset purchase occurs when a buyer purchases all of the assets that make up a particular business. This includes everything a business owns that allows it to run: office equipment, supplies, vehicles, inventory, vendor and customer lists, marketing materials, websites, domains, trademarks, other intellectual property, plus whatever I might have forgotten.

While acquiring a business in this manner can be rather inconvenient in the sense that some assets will need to be retitled once the purchase is complete, it offers buyers several other advantages. One of the biggest advantages offered come in the form of liabilities. When one purchases just the assets of a business, they enjoy the luxury of being able to fully avoid all existing liabilities of the company or they can selectively choose which liabilities they wish to assume. To that end, it also allows buyers to take advantage of a stepped-up basis in their newly acquired assets when the purchase price exceeds the aggregate tax basis of the assets being acquired.

An asset purchase acquisition is also nice in the sense that it allows buyers to acquire a business that otherwise might not have be available because of a minority interest that refuses to sell. They are a great end-runaround for a transaction that otherwise might not be possible but for that minority interest.

What is a Stock Purchase?

By contrast, acquiring a company through a stock purchase is arguably a logistically easier transaction that simply involves purchasing all of the stock of a company, whether that stock is comprised of LLC units or S-corp shares. When one purchases an entity’s stock, that buyer in essence is also purchasing all of the assets owned by the company. To the extent that not only will virtually no assets need to be re-titled following the sale, but buyers also largely avoid the necessity of transferring or reapplying for permits, leases, employment agreements, etc., stock purchases are typically a less difficult path to navigate, especially if few shareholders are involved. As an added benefit, stock sales, unlike asset purchases, are typically not subject to sales or transfer taxes to which asset transfers usually are.

Just because the path is easier, however, it doesn’t mean the transaction doesn’t have its own negative aspects. One of the larger downsides of a stock purchase is recognized with respect to the assumption of liabilities. Unlike asset purchases where one can entirely avoid the underlying company’s liabilities, a buyer acquiring a company through a stock purchase is subject to all known and unknown liabilities that a company may have at the time of purchase. Depending on the nature of the business being acquired and a buyer’s level of risk tolerance, this reality could foreclose many a buyer from pursuing through a stock acquisition.

Depending on the business, there are two other possible complications that should be addressed. Unlike an asset purchase where you can largely avoid the impediment of minority shareholder interests, these interests will need to be addressed and fully dealt with when proposing a stock sale.

A similar complication comes at the hand of both federal and state law. The very nature of a stock purchase calls in the possible applicability of securities laws. Depending of the particulars of the business, buyers and sellers could well be faced with ensuring compliance with both state and federal securities law. This is certainly a doable proposition, but one that buyers should recognize can slow down or fully impede the process.

Which is Right for You?

Choosing between a stock purchase and an asset purchase may not always be easy or intuitive. Even if you do have a preference, buyers often times find that the seller dictates how he wishes the sale to proceed, in which case you may not have a choice but to decide whether you are amenable to going down his chosen path. That said, these are obviously very serious transactions. While buyers are always well served with understanding their options, a little bit of knowledge is not a substitute for experience. Always consult with professionals when contemplating the purchase of a business. This should be a collaborative effort between a buyer, attorney and CPA, at a minimum, to ensure your interests are protected.