Why you Should Purchase the Assets of a Company Rather than the Stock

One of the problems that you may encounter when buying a business in New York is understanding how to structure the purchase.  Basically, there are two ways that you can buy a company:

  1. Asset Purchase;
  2. Stock Purchase.

In most cases, you will be better off purchasing the assets. There are three big benefits to buying the assets and not purchasing the stock:

  • Tax benefits. With an asset purchase, you can give different purchase prices among the various pieces of the company.  For example, certain equipment can be deducted immediately so you may want to assign a greater price for those assets.
  • You can choose not to acquire liabilities of the business you wish to buy. Perhaps the company failed to pay a supplier for goods it ordered two years ago.  The statute of limitations on a breach of contract lawsuit is six years, so you could be hit with a lawsuit four years after buying the company.
  • You don’t have to buy every asset of the corporation. It could be in you best interest to buy only the profitable portions of the company.

Sometimes you are not given the choice of how a business sale could be structured.  Many business that are for sale require purchase of stock only for a variety of reasons. For example, the seller may believe that there are tax advantages for selling all the stock.  If you have to buy corporate stock, it is imperative to conduct a thorough investigation of the corporation’s books and other financial dealings.  You can insert warranties and indemnification clauses in the stock purchase agreement. You may also be able to purchase insurance.

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