Why Buying a Company’s Assets Instead of Stock May Be More Beneficial

Key Takeaways:
  • Buying a company’s assets instead of its stock helps limit liability, ensuring you don’t inherit past legal or financial issues.
  • An asset purchase offers tax advantages, allowing you to depreciate and amortize assets from day one for maximum financial benefit.
  • Careful planning and expert guidance are essential when structuring an asset sale to ensure you get the best deal and avoid hidden risks.

 

When considering the purchase of a business, one important decision is whether to buy the assets or the stock of the business itself. This decision can significantly impact your liability, tax benefits and overall financial health. Here are some key reasons why buying assets might be the better choice.

What is an Asset Sale?

An asset sale involves the transfer of specific assets and liabilities – or pieces of the business – from the seller to the buyer. The buyer acquires the individual assets of the business along with assuming certain liabilities. However, the company’s stock and the legal entity that houses the business remains with the seller.

Asset sales are often preferred when the buyer wants only certain assets of a business without taking on all of its obligations. For example, if a buyer wants to acquire a company’s customer base and intellectual property but does not want to assume any outstanding debts or legal liabilities, an asset sale would be the appropriate choice.

Limiting Liability

One of the primary reasons to buy assets instead of the business itself is to limit your liability. When you purchase the stock or interest in a business, you inherit everything that has happened in the company’s past. This includes any pending lawsuits or liabilities for products developed before your ownership. Essentially, you need to know what you’re stepping into, and sometimes even the sellers might not be fully aware of potential issues that could arise.

Disclosure is essential in these transactions, but even with full disclosure, you are still held to previously signed documents, including employee contracts or guarantees signed by the previous owner. By purchasing only the assets, you can avoid these potential pitfalls and start with a clean slate.

Tax Benefits

Tax benefits are another significant advantage of buying assets. When you buy assets, you are purchasing items that can be depreciated and amortized. This means you can start depreciation from day one, giving you the benefit of a full depreciable lifespan. In contrast, if you buy the entity as a whole, you are associated with the entity and cannot change the life of an asset. The business’s assets may already be halfway or more through their depreciable life, and you only realize the benefit of what remains.

Goodwill, which you may also be purchasing as an asset, can be amortized and deducted over time. Negotiations over the purchase price and allocations are important for both the buyer and the seller, as what is beneficial for tax purposes for one is not necessarily advantageous for the other. Having your own advisors – including your accountant and an attorney – involved in these negotiations is essential to ensure the deal is structured fairly.

The sooner you can inform your advisors that you’re thinking of buying a business or its assets, the better. Reaching out to your advisors early allows for a longer runway to start looking at the balance sheet and take advantage of opportunities to structure a tax-advantageous deal. If you only give your advisors 30 days, their hands are somewhat tied, and it may be too late to take full advantage of these opportunities.

Know What you’re Buying

When buying assets, it’s crucial to know exactly what you’re purchasing. If you’re buying something you aren’t familiar with or you haven’t worked in that industry, it’s worth hiring a qualified appraiser. An appraiser can tell you if the assets will work for another 10 years and if they are solid investments.

Assets to be acquired can range from manufacturing equipment to inventory, office computers and copiers, real estate, customer contracts, intellectual property, vehicles and even intangible assets such as goodwill and the company name. If “Joe’s Candy Manufacturing” is a known name with a good reputation, it can be bought as an asset without acquiring the business entity.

Some assets may not be valuable anymore, such as computers, which generally depreciate to zero value over five years. The same is true for buildings. When purchasing business assets, you need to consider how you want to own the building. It’s often recommended to spin the building out and have it owned by a separate entity. This allows for different income structuring and makes it easier to sell the building if you decide to move to a new location.

In the event the asset transaction is a “distress sale” by a seller whose business is in trouble, as a buyer you must be extra diligent about checking titles for all assets purchased to ensure they are clearly stated. Additionally, your attorney should research whether there are any tax liens or other types of liens on the property or equipment being purchased.

Price Negotiations

Expect more price negotiation when buying assets compared to buying the entity. That’s because it may not be as beneficial for the owner to sell only the assets, as they may face a higher tax liability with an asset sale, with more of the income taxed at ordinary rates rather than capital gains.

Trends & Upcoming Changes

Higher interest rates for the past couple of years have slowed down business asset sales slightly, but that trend has been offset by a generally strong acquisition market. Most educated buyers want to buy assets for a reason, and they make the transaction work despite the challenges.

Tax legislation is expected this year given that major provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 are set to expire on Dec. 31, 2025. It is a possibility that 100% bonus depreciation will be considered for reinstatement, which would significantly benefit asset acquisitions. Additionally, the Qualified Business Income (QBI), or Sec. 199a, deduction is expected to be extended, benefiting those looking to get into a business.

Other potential changes include adjustments to the estate tax exemption and energy tax credits, which could also impact the decision to buy assets versus the business itself.

Questions?

Buying assets instead of the business itself can provide significant advantages in terms of liability, tax benefits and flexibility. However, it requires careful planning, thorough due diligence and expert advice to ensure the best outcome for your investment.

If you are considering buying the assets of a business, contact an Adams Brown tax advisor.