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Buying A Business: Assets or Stock

Usually, the buyer of a business prefers to purchase the assets of the business rather than the stock or interest of the business. This structure allows the new owner to re-depreciate the assets and enjoy a step-up in basis. However, there are times a stock or interest purchase makes sense for a buyer.

When a company has valuable contracts with government entities or other corporations, a stock sale may make sense. Renegotiating these contracts may prove costly for the purchaser or even impossible in some circumstances. When evaluating a business with a significant amount of business derived from long-term contracts, the buyer should determine whether the contracts are assignable. Assignability may lessen the benefits of a stock purchase.

Intangible assets such as patents, trademarks, or goodwill may give the purchaser reason to prefer a stock purchase. Although these assets may be purchased from the seller, the purchaser may end up paying a higher price for these assets because of their perceived value. Rolling them into one complete (the stock) may result in a more promising price negotiation for the purchaser. Line item negotiations can become expensive for any buyer confronted with a pugnacious seller.

There is no rule that fits every sale of a business. The structure must be selected on a case by case basis with a careful eye to future costs and tax consequences.