When considering purchasing an existing business, a common question arises regarding whether to purchase the assets of the business or to purchase the business entity itself. For example, if purchasing a small sandwich shop which is owned and operated by Acme Corporation, should the buyer purchase the assets of the sandwich shop or should the purchaser buy the stock of Acme Corporation? As with many questions under the law, the answer is that “it depends” and the purchaser would be well-advised to seek legal and financial advice.
Generally speaking, the best answer is that the purchaser of an existing business should buy the assets of the business but not the entity itself. Where the existing business is owned by a corporation, the purchaser would buy the corporation’s assets but would not buy the stock. By doing this, the purchaser gets the benefit of what is needed to take over and operate the business, i.e. the assets, but does not take on the liabilities or debts owed by the corporation.
In the example of the sandwich shop owned by Acme Corporation, the purchaser could purchase all of the hard or tangible assets such as the equipment, furniture, signage, and inventory as well as the soft or intangible assets such as the name, the good will, the customer and vendor lists, etc. However, the person who owned the stock of Acme would remain the same since the stock is not being purchased. If Acme had a liability–such as a person injured by a slip and fall in the sandwich shop–the corporation would be “on the hook” for the liability but the assets of the corporation would be sold free of that claim. As a result, the purchaser would not be held liable for the injury.
On some occasions, a stock purchase, as opposed to an asset purchase, makes sense. For example, consider a corporation that owns ten rental homes located on ten different parcels of land. If the purchaser buys only the land/homes, then each parcel will have to be re-titled into the purchaser’s name. This would involve considerable expense, especially in a state such as Florida where the purchaser will have to pay substantial documentary taxes as a result of the transfer. If the purchaser buys the stock in the corporation which already owns the ten properties, then the re-titling will not be necessary.
Ultimately, the purchaser of an existing business should seek legal counsel from early in the contracting process. This will allow the purchaser to decide which method works best for that particular business.
