A Tax efficient Business Asset Purchase Transaction
Asset Purchase v. Stock Purchase: liability issues
An “Asset Purchase” involves the purchasing and valuing of the assets of an ongoing business. A “Stock Purchase” agreement, on the other hand, means you’re buying the stocks or shares of a business entity
such as a Corporation. In California, Asset Purchase transactions are most prevalent because it is mitigates the risk associated with purchasing a legal entity such as a Corporation. When you buy a Corporation you are stepping in the shoes of its owners, thereby assuming all the attendant creditor and government liabilities predating the purchase transaction. Whereas when you buy only the Assets of a Corporation or a business (not the entity itself) you are not taking on the liabilities of that entity.
Asset Purchase v. Stock Purchase: Tax implications
Structured properly, an “Asset Purchase” benefits the buyer because it allows a depreciable step-up in the values of the assets being purchased, while correspondingly creating a large tax bill for the Seller on account of Depreciation Recapture. What this means is that the Buyer will get to re-depreciate from a current market-valued level the already-depreciated assets on the Seller’s books, thereby expensing and deducting depreciation for years to come. It follows that ascribing values, at the time of purchase, to the different assets being purchased should be done with much finesse and foresight.
For instance, a Buyer in an Asset Purchase transaction should want to allocate as much as of the purchase price as permissible to assets that can be depreciated rather quickly, such as inventory & receivables, furniture & equipment, goodwill. Conversely, allocate as little as possible to longer-depreciable assets such as buildings, land and the like.