Buying the assets or buying the company

The short version

• You can buy a business's assets, or buy the company itself.
• Most small business purchases are asset purchases. Buyers usually prefer them.
• Asset purchases leave most past liabilities with the seller and give you a tax benefit.
• Buying the company keeps contracts and licenses in place but brings its history and liabilities with it.
• Agree on the structure in the letter of intent, with your M&A attorney and CPA.

Two ways to buy

An asset purchase. You form your own company and buy the business's assets: equipment, inventory, customer relationships, the name and goodwill. The seller's company keeps its own past debts and liabilities, unless you agree to take some on.

A purchase of the company. You buy the shares of a corporation or the membership interests of an LLC. The company continues as it was, with its contracts, licenses, history and liabilities, under new ownership.

Why buyers usually prefer asset purchases

• Fewer surprises. Past lawsuits, tax issues and debts generally stay with the seller's company.
• A tax benefit. You can write off the price paid for assets over time, which lowers your taxes in the years after you buy.

When buying the company makes sense

• Contracts and licenses that cannot easily be transferred stay in place. Some still need consent when ownership changes.
• Government contracts or permits may require the same company to continue.
• The seller may insist, because it usually costs them less in tax.

If you buy the company, rely on strong promises from the seller in the purchase agreement, careful due diligence and money held back at closing to cover past problems.

How the price is split

In an asset purchase, the price is divided across classes of assets, and both you and the seller report the split to the IRS on Form 8594. The split affects your taxes for years. More assigned to equipment can mean faster write-offs for you, while the seller may prefer more assigned to goodwill. It is negotiated.