Module 11-: The process of purchasing a business can be very cumbersome such that even the professionals who do this for a living can get confused. There are just so many things to be done, so many factors to consider and so many precautions to take to avoid running into problems later on.
This is why we have decided to do a ‘buying a business’ series to touch all aspects of business purchase and simplify it as much as possible to make it easier for you to understand. So that even if you are hiring professionals to help you handle a business purchase deal, you wouldn’t be a novice as you would already understand the process fully and make informed decisions.
There are two major ways to handle a business purchase procedure; you may either choose to buy the business assets or opt for stock purchase instead. Now, let’s explain each one.
Company’s Asset Purchase
Assets purchase means that you would buy the physical assets and non-physical assets owned by the business; the entire business as a going concern becomes yours. What makes up a business after all is the assets of the business that are put together and used to generate income. The assets that you would have to buy include physical assets like motor vehicles, buildings, office equipment, furniture and fittings, inventory, computers and several other tools. You could also purchase intangible assets like the company’s website, its logo, existing customers and suppliers, websites and other such intangibles assets.
Also, you can choose to retain all the current employees of the business and take over all lease rights and ownerships of assets like lands and buildings. If the company you intend to buy has some rights that it currently enjoys which you think would be useful for you, you can decide to purchase those rights to. For instance, such things like permits, licenses and contracts can be transferred to you.
However, you cannot afford to think about the assets alone, during this type of business negotiation, the liabilities of the business would also be transferred to you but the good thing is that you could go into an agreement with the seller such that you would be allowed to choose which liabilities and assets you are willing to purchase and which ones you would rather not have.
Stock purchase on the other hand is a different ball game entirely. All you would have to do is purchase the stocks (shares) of the business such that ownership of the business is transferred to you and not just the assets. Let me break it down a bit. When you want to invest some of your money and you ask your stock broker to help you purchase stocks; what you are doing is buying a very small part of the business.
You become one of the owners of the business and the business owns all the assets. You are not just buying the chairs and the computers; you are buying ownership of the business. The extent of your ownership of the business would now depend on the percentage of the business shares that you own and the profits/dividends that would be paid to you would also be subject to the shares you own. There are no need for re-negotiations, transfer of titles, reapplications and all the other technicalities. Get it now?
Now, to the crux of the matter; which of these is better for you? Which offers you more benefits and protection as a buyer in a business sale negotiation? Let’s consider some of the important factors that need to be taken into consideration.
Buying Company Stock Vs Asset Purchase: Which is the best?
a. Taxes-: When you are making your business purchase decisions, you should always be conscious of the tax implication of every decision you make. Taxes would impact your earnings and your cash flow hence; you must approach it with care. If you are looking for the business purchase method that would offer you the lowest tax liabilities, then you should consider buying assets as against stock purchase. Business sellers try to avoid this type of sale because it attracts higher taxes for them and would prefer stock sales but as a buyer, assets purchase is better for you tax-wise.
b. Liabilities-: Assets purchase is also more favorable for a business buyer when liabilities are considered. Purchasing stocks of a business means that you would have to take over its liabilities as well. Some of these liabilities may be unknown or unwanted by you but you still have to take over when you agree to a stock purchase negotiation. If you must purchase stocks of a business however, ensure that you do your due diligence and find out about the businesses’ existing liabilities so that if there are any liabilities that you do not wish to assume, you can negotiate with the seller so that such liabilities are retained by the seller.
c. Goodwill-: If you choose to purchase assets instead of stocks; then you have the advantage of amortization of goodwill for tax purposes for fifteen (15) years.
d. Securities Exchange Rules and Regulations-: If you are opting for a stock purchase option, you would have to be guided by the rules and guidelines of the Securities Exchange Commission but assets purchase on the other hand does not involve adherence to any of such rules.
e. Complications of Procedure-: Another factor to consider when you want to determine which method of purchase to go for is the ease of each process. While stock purchases is less complicated, assets purchase is complicated because there are a lot of negotiations involved and even when the sales contract is completed, a lot of steps still have to be taken by the buyer. For instance, if the company had an existing lease, the buyer may have to renegotiate the lease contract in a situation where the contract cannot be transferred automatically to the buyer. Stock purchase on the other hand is easier especially when the company has only few shareholders.
These are some of the factors you have to consider in order to make a decision as to whether you should purchase assets or just go for stocks instead.
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