What is an asset sale?
In a May 10 Ask FSB, a reader asks the difference between an asset sale and a stock sale. Have you bought a business in an asset sale? Have you sold a business in a stock sale? What did you find are the upsides and the downsides? Post your thoughts.
From Richard Parker, Fort Lauderdale, Florida There may be instances when a stock sale can make sense for a small business (some posts point out some specific scenarios). However, after being personally involved in thousands of small business purchase/sales with my firm (www.diomo.com) the vast majority, and almost all of them are done as asset sales. Unless there are extenuating circumstances such as the transfer of contracts or licenses, then an asset sale is almost always the route to go for a buyer. Further, the suggestion that adequate indemnifications can be provided by a seller do not hold any water whatsoever unless there is a substantial seller note in place with crystal clear verbiage for set off and even then, it is not bullet proof. I think Anne Fisher's advice was right on target for this deli buyer.
From Greg Olivares, San Antonio, TX When we bought our paper store as an asset purchase last December, we were most excited about picking up the intangibles of the business (tradename, references, existing vendors relations) at virtually no cost. We discovered within the first two weeks that with the corporation, go the intangibles. Each and every vendor made us re-submit for an account, which meant brand new credit checks which meant time delays in re-stocking the store. So our "turn-key" business turned more into a "push it for a while and pop-the-clutch" kind of store. Also, banks gave no consideration to the previous financials since that company disappeared, so we were back in start-up mode. It took about three months to get everything running smoothly again (nothing like hearing that your URGENT order has been delayed and turned over to accounting because they need to do a credit check, despite the fact they've been doing business with that store for five years). We pushed through the paperwork and got running again, albeit without the great cashflow in the beginning that we had been counting on. Not a reason to avoid an asset purchase, but something to be aware of as you lay out your first year financials.
GregO
From Julian, Miami, Florida I think your comments that a stock purchase has potentially adverse consequences vis-a-vis an asset purchase are shallow. As you know, you can obtain representations from the seller re liabilities and couple this with an indemnification. Additionally, you can seek treatment of the stock purchase as an asset purchase in many circumstances.
From Roy Adams Wichita Falls Texas 76301 As a business broker for twenty three years, I've seen some deals go south over tax issues. In a recent sale of an optometrical business, the buyer wanted a stock purchase for several reasons. First, the physical or depreciable assets were small; under $50,000.00 She had little money for a down payment but was working in the business when the elderly owner wanted to sell. The owner wanted her to buy it because her chance of success was higher than someone from out of town. With debt service issues firmed, she borrowed ten thousand on a credit card, bought some shares and paid for the remaining shares monthly. She didn’t have to qualify for credit with suppliers, utilities and such since everything stayed the same except percent of shares owned. There are times when a buyer trades off smaller tax advantages for the opportunity to get into a business.
I am in the process of buying a small medical business. The owners say the only way I can have the accounts receivable included would be via a stock sale. I am thinking the benefits of having the accounts receivable are greater than doing asset sale. Any advice on this would be helpful.