Buying a business: Asset Sale vs Stock Sale

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So you’ve saved your money and now you are ready to buy that business and make your American dream come true. Do you buy the stock of the company or the assets? This is a very important decision.

If a business is set up as a corporation, the owner may want to sell you the shares of the business. This is called a stock sale. Seller like this type of deal because their profits get taxed at capital gains rates instead of income tax rates which is often higher.

An asset sale on the other hand is a sale in which you buy the underlying assets of the business. For example if you are buying a resteraunt you would buy all the equipment and assume the lease on the property or purchase the building if that’s the case.

So what’s the big difference to you - the buyer? Buying stock not only transfers the assets, but it also transfers the liabilities. If someone slipped and fell 2 days before you buy the stock you would still be on the hook for the liability. Another benefit of an asset sale is you get to depreciate all the assets by class. This can be tax-advantageous. If you do a stock purchase, the assets would have already been depreciated and you won’t get as much depreciation value to reduce your taxes.

Stock sales for small businesses generally don’t make sense for small businesses and as such are rare for small business. As a business consultant doing acquisition and brokerage I rarely see stock sales.