Business Purchase Options

In its simplest terms a business can be purchased in two basic ways: asset purchase and stock purchase. Whatever form of purchase is used there are numerous way of financing the transaction.

Stock purchase refers to the purchase of the entire entity, which most often involves a corporation's stock or other means of ownership (e.g. LLC units for a limited liability company.) The buyer in effect steps into the shoes of the seller, and the operation of the business continues in an uninterrupted manner. Unless specifically agreed to, the seller has no continuing interest in, or obligation with respect to, the assets, liabilities or operations of the business.

A stock purchase basically means you are investing and buying everything the seller owns including stocks, assets, and liabilities, the right to sell products as well as the intangible assets (logo, patents or client list, domain names, copyrights, licenses, distribution agreements, secret processes and formulas, informational databases, software systems and core technology).

In an asset purchase on the other hand, the seller retains ownership of the shares of the business. Only assets and liabilities which are specifically identified in the purchase agreement are transferred to the buyer. All of the other assets and liabilities remain with the existing business. The buyer must either create a new entity or use another existing entity for the transaction.

The preferable method is a matter of the facts of the specific transaction. But some of the highlights for both parties are enumerated below.

The Seller
In a stock purchase, the seller has no continuing interest in, or obligation with respect to, the assets, liabilities or operations of the business. This may be preferred because it allows the seller to completely step away from the business.

Another benefit could come from taxes. The seller realizes a gain or loss on the transaction based on sales price and initial worth of stock. The gain is taxed at the lower capital gains tax rate and the loss may in certain circumstances (S.IRC Section 1244) be deductible against ordinary income.

The Buyer
A major attraction of the asset purchase is that buyer can pick and choose which liabilities they want purchase.
If the business has a significant number of actual or potential liabilities, which are difficult to value, then asset purchase is a great way to buy the business. A stock purchase though may prove beneficial where the business is doing well and owner is selling possibly due to retirement. The buyer assumes good performing assets and liabilities and the goodwill of the business. The opposite would be true if the business were poorly managed. Additionally in asset purchase tax benefits would usually accrue to buyer. These may take the form of larger tax depreciation due to write up of assets.

In conclusion, in order to reap the benefits of purchasing an existing business, due diligence in researching the venture is of utmost importance.

Sources
http://www.bizquest.com/resource/basic_deal_structures__stock_purchase_vs_asset_p-23.html
http://www.brighthub.com/office/entrepreneurs/articles/38681.aspx