If you are considering the purchase of a business or franchise one important factor that you must consider and discuss with your business lawyer will be the best method for structuring your purchase transaction. Business purchase transactions are structured either as (a) an asset purchase transaction (where you buy the assets of the sellers business) or (b) a stock purchase transaction (where you buy the stock of the sellers existing corporation). While stock purchase transactions do, sometimes serve a beneficial purpose, in most instances a business purchaser is best served by proceeding with an “asset purchase”.
The benefits to a business purchaser of proceeding with an “asset purchase”, as compared to a “stock purchase”, include:
In the asset purchase transaction, the purchaser acquires the assets of the seller and may negotiate what, if any, liabilities of the seller that the purchaser may be willing to assume. If done properly, in most asset purchase transactions, all liabilities of the seller are cut off. This option is not available in a stock purchase transaction where the purchaser is buying stock in a corporation that may be subject to undiscovered liabilities and lawsuits.
In the asset purchase transaction, the purchaser is given the opportunity to fully value and “step up” the basis of the assets purchased. Basically, the assets, including goodwill, will be valued on the purchaser’s books and records for amounts equal to the full amount of the purchase price and will therefore result in greater depreciation deductions that will benefit the purchaser down the road. In the stock purchase transaction, since you are purchasing stock – not the business assets – you inherit the existing financial statements of the seller that, in all likelihood will have seriously depreciated the assets of the business and have diminished the beneficial depreciation deductions that will be available in the future.
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