Structuring a Stock Purchase

Structuring a Stock Purchase

When looking to buy a business or sell a business, it is important to think about how you want to structure the business transaction. There are two common ways to structure a business transaction – through a stock purchase or an asset purchase. This article goes in-depth on structuring stock purchases. For more information on asset purchases, see Structuring an Asset Purchase.

What is a stock purchase?

A stock purchase is when the acquiring party purchases the stock of a company. Sellers tend to prefer this type of business transaction. In a stock purchase, the buyer assumes all the assets and liabilities of the business.

For a buyer, a stock purchase requires more due diligence upfront. This is because, at the end of the day, you don’t want an unforeseeable liability. Unknown, not stated, or uncollectible accounts are the largest risks of a stock purchase.

Entities such as a sole proprietorship, partnership, or limited liability company do not transact as a stock purchase. This is because the entities do not have stock. Alternatively, the owners can sell their partnership or membership interests as opposed to the entity selling its assets. As such, if a business is a corporation, the buyer and seller will decide whether to structure the transactions as an asset sale or stock sale. Most mergers and acquisitions are stock purchases.

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Advantages of Stock Purchases

The primary advantage of a stock purchase is that the business is easy to transfer. The purchase agreement does not distinguish what assets and liabilities the buyer is assuming as they assume everything. For a seller, this type of transaction is preferred as it leaves them without liability after the transaction is complete.

The next advantage is that the buyer has no need to create a new company. Any contractual agreements stay in place. This includes employees, suppliers, customers, etc… This is a key advantage for many business transactions. The buyer can normally obtain these contracts, permits, and licenses without the consent of the other party.

Next, in states that impose sales or transfer taxes on the sale of assets, a stock purchase can avoid some or all of these taxes.

Last, if the selling company does not have many shareholders, a stock purchase is often less complicated.

Disadvantages of Stock Purchases

There are several disadvantages to a stock purchase. Namely, the buyer does not have the advantage of choosing which assets and liabilities they will assume.

Next, the goodwill in the business is not tax-deductible when it exists in the form of a share price premium. This is also known as the “step-up” tax benefit.

In addition, shareholders particularly minority shareholders can complicate and extend the process. They can also increase the cost of the acquisition.

The last disadvantage for the buyer is the increased risk of being liable for unknown liabilities and uncollectible accounts receivable.

Summary

Knowing how to structure a business transaction whether a stock purchase or asset purchase is key. With the help of a lawyer, accountant, and business appraiser, you can be confident in your decision. For both the buyer and seller, the structure of the business transaction can have significant tax and other business-related consequences.

Peak Business Valuation, business appraiser, sees dozens of business transactions each week. We are happy to answer any questions you have about stock purchases or asset purchases. Feel free to reach out via email or schedule your free consultation below.

 

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