10 Jun Stock or Asset Sale?
I often get this question when listing a business for sale, and almost all of the time, I recommend an asset sale. What you need to grasp is the concept that when you purchase a corporation, you as the buyer simply step into the shoes of the former owners. In essence, you assume all liabilities such as taxes, employees, accidents, suppliers, and pending lawsuits or new ones that have yet to pop up.
I personally found myself in this scenario a number of years back when I purchased the corporation of a fixed-wing airport business in Los Angeles. Just a few months after the purchase I got a call from my bank informing me the state was in the process of cleaning out my account for back payroll taxes left unpaid by the previous owner. An expensive lesson I’m happy to share.
On the other hand a stock sale can take place in a matter of days, and for many the speed of the deal can prove mighty enticing. All stock sales also require the services of an attorney for the stock transfer. However, I generally recommend taking your own good time, performing your due diligence and identifying as best as you can the status of any existing or potential liabilities. Even so there are times when both the buyer and seller desire a stock sale, and as long as both parties are aware of the potential issues it can prove a good fit. An example of this could be a current or former employee who wants to buy the business and is quite familiar with the operation and the history. In such a case they may be a better candidate for a stock purchase. There is also another solution to this dilemma of past unknowns that may set minds at ease for both the buyer and seller. Escrow instructions can be structured directing a percentage of funds be held for a specified period of time (up to a year) to cover any unknown liabilities incurred before the sale.
Where there’s a willing buyer and a willing seller—there’s a way. Deal done.