Buying A Business With An Asset Purchase Or Stock Purchase?
There are two basic options for buying a business, you can either choose an asset purchase or a stock purchase. Deciding which to choose between the two options can be a fine art.
What Is an Asset Purchase?An asset purchase is like having an all-you-can-eat buffet. It allows you to be able to pick what you want and ignore the funny tasting stuff. You have a chance to sample everything and pick only what you want.
In an asset purchase, you essentially strip the business you want to buy to the bare bones. Then you pick the assets you want and leave behind what you do not want. The obvious advantage of this is that you get to see exactly what it is you are buying before you take the plunge.
You also have the added advantage of being able to shed what you feel you cannot carry. This is a very *safe* approach as it exposes you to less risk. However, you will have to form a new entity to hold the assets you have stripped from the old business. This may be a disadvantage as you would have essentially *ended* the old business.
What Is A Stock Purchase?Compared to an asset purchase, a stock purchase is like buying a watermelon and having to get home before you know if you made a good buy. You may not see a good portion of what you buy and even if it checks all the right boxes on the outside, the truth is: you just do not really know.
In a stock purchase, you buy the whole company. It involves a transfer of the entity you are interested in, as it exists. Sellers may often insist on this sort of purchase if they do not want you to get rid of existing staff.
The advantage of this sort of purchase is that you get the whole business. Unfortunately, it also means you get the good, the bad and the downright horrifying. You may not be allowed the same level of freedom to look around the business as you would in an asset purchase. This makes the presence of hundred-year old skeletons more likely.
Which Is Better? An Asset Purchase Or Stock Purchase?The short answer is: it depends. The seller may insist on one and not the other, you may have verbal obligations you have made to existing staff, or the contract of service between the seller and his staff may prevent him from stripping the business. It all depends.
What is certain though is that the stock purchase tends to be riskier. There is always the possibility that there will be hidden matters, either by mistake or design. In general, the asset purchase will be your safest bet.