A short YouTube explainer (Donna Bordeaux, Calculated Moves) outlining the practical differences between asset sales and stock (equity) sales when buying a business. It contrasts buyer exposure to pre-existing liabilities, typical prevalence of asset sales in small-business transactions, special cases favoring stock sales (e.g., government contracts), and basic tax/depreciation differences.
When purchasing a business, there's a big difference between an asset sale and a stock sale. You need to understand the two differences so you can understand how the transaction will actually work out and what your potential risks and rewards may be. So first off, let's talk about the difference. An asset sale is buying the equipment. I come in, and I'm the new buyer of that business. I want to buy the assets of the business and all of the equipment that you have, or maybe even just partial. But I don't want to take on all the liability for all the things that have happened before I arrived on the scene. So I do not want to buy the stock that you own or the entity structure that you had before that. It also may be that that entity structure is not appropriate for me, not in my best interest from a tax consideration. So in 90% of the cases of small businesses, we see asset sales. That way, you will buy the equipment, you'll buy the goodwill of the business, the customer list, and sometimes some of the equipment may actually not go with the business. So, for example, if the owner's car were in the business, that may be an asset that is not sold. In the transfer in the stock sale situation, you're actually taking and stepping into the shoes of the prior owner. So you take on all the liability of that company, any of its contracts, and anything that it has done in the past is all yours. So you have to be very careful of this because you want to make sure that the prior owner didn't do any damage or any reason that somebody would come back and sue. Now, there are cases where a stock sale is the only way you can go. For example, if you had government contracts to sell a product or sell a service, you may not be able to just renegotiate those contracts just because you step in to buy the business. And that again, takes a lot more due diligence to do that type of deal. It's usually reserved for larger sizes of businesses than the traditional small business sale. So beware what you're doing. Also, there are tax considerations when you buy a business. So in an asset sale, you'd be buying that equipment as new equipment you would start the depreciation over. That gives us some flexibility or some creativity that we work with. If you were stepping into the shoes and being a part of a stock sale, you'll just continue to depreciate assets the way they were on the books. So I hope that helps you understand where your business sale, how it will be structured, and what you'll do when you talk about how the agreement is written. I'm Donna Bordeaux with calculated moves. Let us know if you have any questions. Please don't hesitate to follow us on YouTube and Facebook. And Instagram, too. Thank you, Sam.
