owner is selling their business they

have two choices they can choose between

an asset purchase transaction and a

stock or Equity purchase transaction

what’s better for the buyer is the exact

opposite of what’s better for the seller

so if we look at an asset purchase

transaction

buyers prefer asset purchase

transactions for two reasons first from

an income tax standpoint when a buyer

purchases assets they get to take the

purchase price allocated among the

assets purchased and they get to take

tax write-offs in the future that

reduces the income that they pay tax on

in addition from a liability standpoint

the buyer purchases specific assets and

specific liabilities and if there are

any contingent liabilities or unknown

liabilities let’s say it’s a potential

lawsuit the buyer does not have any

responsibility for that lawsuit

now the reason the seller

doesn’t like the asset purchase

transaction is because it generally

results in higher income taxes to the

seller for example ordinary income on

inventory and receivables and they could

have depreciation recapture now the flip

side with a stock purchase or an equity

purchase

the buyer does not like a stock purchase

agreement because unlike an asset

purchase they do not get to take the

purchase price allocated among assets

that they get to take tax write-offs

their purchase price is in the stock or

the equity and it’s not

offset until they sell the stock or

equity in the future now the buyer

prefers the stock purchase because they

will get long-term capital gain

treatment when they sell it they will

not have ordinary income

from a liability standpoint the seller

would get any contingent liabilities any

unknown liabilities