Asset purchase or Share Purchase?

September 11, 2022

by a searcher from Baruch College-The City University of New York - The Zicklin School of Business in New York, NY, USA

I know the general risks of both and why a buyer/seller would want one over the other but as a buyer, is there anything that would stand out in a business that would convince you that a share purchase if the better way to go? Currently working on a transaction sub $500k and it seems pretty straightforward. General DD of financials has already been completed and things check out.

Thanks in advance of your opinion!

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Reply by a searcher
from Cornell University in Los Angeles, CA, USA

Contracts with vendors (large vendors specifically), license(s) that the business holds that goes away with an asset purchase. Asset purchase is starting from scratch. No need to buy a business when you can do it yourself. I ran a large firm and despite my pleas to the PE firm (run by trust fund amateurs) who bought us, kept us and went on an asset buying spree, they ended up gobbling up a bunch of competitors using an asset purchase and clients left. 3 months later, they went under. With asset purchase, you start clean but if you have the capital to buy, might as well start your own. The problems that come with stock purchase can be mitigated with legal docs. If it's too complicated and costly, it's better to get a job than buy a business.

Reply by a professional
from University of Minnesota in Minneapolis, MN, USA

Remember: a stock deal does not NECESSARILY mean the contracts/licenses remain in place. You have to look at whether there are change-of-control provisions or other mechanisms that might complicate the process. Leases and contracts with bigger entities (likes banks and government bodies) often contain these types of provisions that largely nullify the administrative benefits of a stock deal. You have to run the legal diligence to know for sure.

Also just to be clear you can't buy a company's stock and just take over payment of its EIDL loan without the SBA's consent. Lots of people seem to be under the impression that a stock deal solves that problem - it doesn't.

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