Types of Deals When Buying a Business
Assets, Stocks & Mergers
There are basically two types of deals when purchasing a business—either a purchase of the assets of the business, or the purchase of the stock of the company (assuming it's a corporation). In addition, a merger is a special type of stock acquisition, as discussed below. In general, a seller prefers to sell the stock of his or her business, while a buyer will often prefer to purchase the assets.
Purchase of assets
The purchase of assets is a popular form of acquisition. There are four distinct advantages to purchasing the assets of a business rather than the stock. The purchase of assets:
The buyer of the assets of a business does not generally inherit the liabilities of the business, while the stock purchaser does. This is a critical factor in deciding which type of deal is best for you.
Purchase of Stock
There are some particular instances that can tip the scales in favor of the purchase of stock. For instance, if there is a a company that looks very good to you, having done all of your research, but the company has a favorable long-term lease that is not freely assignable, then you may need to purchase the stock of the company if you wish to benefit from the lease. Or if the business is involved in any other type of contract that is not assignable, then the purchase of stock could avoid that potential problem.
Engaging in due diligence should help you determine whether the business's contracts are assignable, and whether the contracts will continue if the stock of the company is purchased by you. Many contracts with major companies, businesses, and vendors have specific clauses dealing with the event of a sale of the assets of that company, and the event of the sale of the stock.
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Most sellers of a business will prefer selling stock, as they often will be able to obtain tax favored capital gains treatment on the sale.
Mergers
Stock acquisitions can be accomplished through direct stock purchases from all of the selling shareholders or through a merger.
A merger is a creature of law that results in one entity being combined (or "merged") into another entity. After the merger, the merged out entity no longer exists, and the business of the combined entities continues in one company.
Mergers can have certain tax advantages. For example, you may be able to accomplish a tax-free merger, where the selling shareholders receive stock in another company and don't have to pay immediate tax on the sale of their shares. Mergers also have the advantage of not requiring that every shareholder approve the deal.
But mergers are complicated and you definitely need the help of an experienced corporate advisor here.
