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Buying a Business, Assets or Stock/Share purchase?

Buy a Business – Asset Purchase vs. Stock Purchase

Buying a business, especially if it is your first time, can be overwhelming. Will you purchase the assets of the business, or its stock? Which is more beneficial for you? There is no clear-cut answer to this question as it really depends on your circumstances.

In an asset purchase, you buy the company’s assets – furniture, vehicles, equipment, inventory, etc. The shares of stocks remain with the seller. In a stock purchase, you are buying everything the seller owns – stocks, assets and liabilities. You take over as the new owner of the business.

Should You Buy Assets or Stock When Buying a Business?

It is worthwhile to seek the services of a corporate lawyer and an accountant before buying a business. They can advise you on what is the best purchase option for you.

If a business for sale is doing well, you can opt for a stock purchase. However, if the business isn’t profitable, a stock purchase may not be the best option because you may be assuming its liabilities. Find out why the business is being sold.

If you want to build your own company, go ahead with an asset purchase. Before doing so, conduct thorough due diligence. Choose the assets you want to acquire, and the liabilities you intend to assume.

Two key factors – liabilities and depreciation – could determine which is the better option for you. When you purchase company stock, you also assume all its liabilities – disclosed or unknown. A seller may not be forthright about all the liabilities during negotiations. You could have also missed uncovering these liabilities during due diligence. In an asset purchase, you can avoid most of the liabilities. You are responsible only for those identified in the purchase agreement.

Depreciation is the process of deducting a portion of the cost of an asset from the income each year. In a stock purchase, you, as the new asset owner, will just continue deducting depreciation as the previous owner did. In an asset sale, though, the tax law allows you to depreciate the entire purchase price.

Asset Purchase vs. Stock Purchase: Advantages & Disadvantages

  1. In an asset purchase, the assets and liabilities are recorded at fair market value. You can claim the fair market value of tangible assets for depreciation, which results in lower taxes. In a stock purchase, the assets and liabilities are carried over and depreciated as before the purchase.
  2. You acquire the entire business, including all assets and liabilities when you purchase the company’s stock. In an asset purchase, you assume some of the liabilities. You can also choose the useful assets you want for your new company.
  3. An asset purchase may require more documentation. The transfer of ownership of the assets, liabilities and related contracts may need to be filed with the appropriate government agencies. This is not a requirement in a stock transaction. A stock purchase is easier and cheaper to implement, especially if the company only has a few shareholders.

In a stock purchase, you inherit the contracts, permits and licenses. In an asset purchase, you need to file or register for these with the appropriate agencies.

  1. There is no problem with minority shareholders who refuse to sell in an asset transaction. Multiple shareholders could block a buyer’s desire to own 100% of the company in a stock purchase.
  2. You may need to pay for sales or transfer taxes on the sale of assets. A stock transaction avoids some of these taxes.

Buying a business is complicated in itself. Each business purchase transaction is unique. Obtaining professional legal and accounting assistance is a must for a successful business acquisition. As a business buyer, which purchase option is better for you?

Contact Performance Business Brokers to discuss at info@performancebb.ca

I want to sell my business now… How do I know if the time is right?

We have received calls from numerous business owners that were planning to go to Market within the next six months, asking what they should do now. They want to know: Is now the time to go to Market? What type of Buyers are we seeing? What should business owners do if they are nearing the right time for a transition and they don’t want to wait?

It may be the right time to start the process of selling your business, or it may not be – it all depends on the business itself, the industry, and a variety of other factors. Daily, we are speaking to Buyers looking for a good fit. Many are Private Equity firms – either directly or through their portfolio companies. We are also seeing Strategic Buyers looking for a “deal,” Private “cash” Buyers who are afraid they missed an opportunity to own their own business, and Family Business Offices looking for that fit that they can hold long-term.

If you have a unique business that has been insulated from the downturn, you will look like a “diamond in the rough” to a variety of Buyers. If you can demonstrate that this downturn is a blip in the economy and that you will be back to normal revenues and profits in fairly short order, you will get Buyers’ attention. If you need to sell now, there are always Buyers looking for a “deal.”

Our advice – if your business continues to do well and the future looks good, now is the time to shine. There is not as much competition from other Sellers, so Buyers have more time to focus on good businesses and plans for growing them.  

Now that you have taken care of some of the business basics, what should you do now if you are in a position to transition soon?

1) Clean up the books and records, know what third-party consents you will need, and look into other “Deal Killers” such as forgotten agreements or verbal commitments to employees, landlords, key customers, vendors, the terms of loans or leases, etc.

2) Be able to articulate how your business has dealt with the COVID-19 pandemic and the company’s plan to be successful into the future. 

3) Talk to your Financial Advisor and discuss a realistic model showing how much cash you will need to have the lifestyle you want. This exercise may help you decide “how much is enough” and ultimately help you decide if now is the right time.

4) Consider how, when, and what you want to say to those who will be affected by the impending business transition. This includes family, friends, associates, employees, etc.

5) Talk to Business Brokers, get an estimate of value for your business, and be realistic – don’t hear what you want to hear – ask yourself, “What would I pay for this company if I was buying it today?”

6) Spend time with your Investment Banker/Broker to ensure they understand your goals for a transaction. Use their experience to help you “spruce up” the company to appeal to the largest group of Buyers. Ensure they communicate with your inner circle of professionals: Attorneys, CPA’s, Shareholders/Stakeholders, and other Advisors who have a vested interest in the best outcome for you and your business. This upfront investment of time will pay dividends throughout the process.  

Contact Performance Business Brokers for your buying or selling needs
info@performancebb.ca