Understanding the Two Ways to Buy a Business
When you buy a business, the transaction is structured in one of two fundamental ways: an asset purchase or a stock purchase (also called an equity or membership interest purchase for LLCs). This structural decision affects everything — your taxes, your liabilities, your SBA loan terms, and your legal protections.
Most first-time buyers don’t realize they have a choice, and many simply accept whatever structure the seller or broker proposes. That’s a mistake. Understanding the differences between asset and stock purchases — and knowing which one the SBA prefers — can save you tens of thousands of dollars and protect you from inheriting problems you didn’t know existed.
This guide breaks down everything you need to know about asset purchases versus stock purchases in the context of SBA-financed business acquisitions.
What Is an Asset Purchase?
In an asset purchase, you buy the individual assets of the business — not the business entity itself. The seller’s company (LLC, corporation, etc.) continues to exist, but you acquire everything that makes the business operate:
- Tangible assets: Equipment, vehicles, furniture, inventory, signage
- Intangible assets: Customer lists, trade names, trademarks, patents, domain names, phone numbers
- Goodwill: The value of the business above and beyond its tangible and identified intangible assets
- Contracts: Customer agreements, vendor relationships, service contracts (subject to assignability)
- Leases: Commercial real estate leases (subject to landlord approval)
Critically, in an asset purchase, you typically do not acquire the seller’s liabilities. Debts, pending lawsuits, tax obligations, and other liabilities remain with the seller’s entity. This is the primary reason buyers prefer asset purchases.
How It Works in Practice
You form a new LLC or corporation, obtain new tax IDs (EIN), apply for new licenses and permits, and execute an Asset Purchase Agreement that itemizes every asset being transferred. The seller’s old entity retains any excluded assets and all liabilities.
What Is a Stock Purchase?
In a stock purchase, you buy the ownership shares (stock) or membership interests (LLC units) of the business entity itself. The company continues to exist exactly as it did before — same tax ID, same contracts, same bank accounts, same licenses — but with you as the new owner.
- You acquire the entire entity, including all assets and all liabilities
- Contracts, leases, and licenses typically don’t need to be reassigned
- The business continues operating seamlessly with no disruption
- Employees remain employed by the same entity
The critical risk: in a stock purchase, you inherit everything — including liabilities the seller may not have disclosed or may not even know about. Unknown tax obligations, pending lawsuits, environmental contamination, employee claims — they all become your problem.
Key Differences at a Glance
Here’s a side-by-side comparison of the two structures:
- What you buy: Asset purchase = individual assets; Stock purchase = ownership of the entity
- Liabilities: Asset purchase = generally not assumed; Stock purchase = all liabilities transfer
- Tax ID: Asset purchase = new EIN required; Stock purchase = same EIN continues
- Contracts/Leases: Asset purchase = must be reassigned; Stock purchase = continue automatically
- Licenses/Permits: Asset purchase = new applications needed; Stock purchase = typically continue
- Employee continuity: Asset purchase = technically new employer; Stock purchase = same employer
- Tax basis: Asset purchase = stepped-up basis; Stock purchase = carryover basis
- Complexity: Asset purchase = more complex closing; Stock purchase = simpler transfer
- Buyer preference: Almost always asset purchase
- Seller preference: Often stock purchase (for tax reasons)
Tax Implications: Where the Real Debate Happens
The tax differences between asset and stock purchases are significant and often drive the negotiation between buyer and seller.
Tax Benefits for Buyers in Asset Purchases
Asset purchases provide buyers with a stepped-up tax basis in the acquired assets. This means you can depreciate and amortize the assets based on the purchase price you actually paid, not the seller’s original cost. The benefits include:
- Equipment depreciation: Depreciate equipment at fair market value, potentially using Section 179 expensing or bonus depreciation for immediate deductions
- Goodwill amortization: Amortize goodwill over 15 years, creating annual tax deductions
- Non-compete amortization: Amortize the value allocated to non-compete agreements over their term (typically 3-5 years)
- Inventory deduction: Deduct inventory costs as goods are sold
These deductions can be worth hundreds of thousands of dollars over the life of the business, significantly reducing your effective tax rate in the critical early years of ownership.
Tax Impact on Sellers in Asset Purchases
Sellers often resist asset purchases because of the tax consequences:
- Double taxation for C-corporations: The corporation pays tax on the gain from selling assets, and then shareholders pay tax again when they receive distributions from the liquidated corporation
- Ordinary income recognition: Amounts allocated to inventory, accounts receivable, and depreciation recapture are taxed as ordinary income (higher rates) rather than capital gains
- Less favorable allocation: Buyers want more allocated to depreciable assets; sellers want more allocated to goodwill (capital gains treatment)
Tax Benefits for Sellers in Stock Purchases
Sellers prefer stock purchases because:
- Single level of taxation: The seller pays capital gains tax only once on the difference between their basis in the stock and the sale price
- Capital gains rates: The entire gain is typically taxed at favorable long-term capital gains rates
- No depreciation recapture: Since assets aren’t being sold individually, there’s no recapture of depreciation at ordinary income rates
The Tax Negotiation
Because the buyer and seller have opposing tax preferences, deal structure becomes a negotiation point. Sometimes sellers will agree to an asset purchase if the buyer increases the purchase price to compensate for the seller’s additional tax burden. This “tax gross-up” is a common compromise.
Why the SBA Prefers Asset Purchases
The SBA strongly prefers — and in most cases requires — that acquisitions be structured as asset purchases. Understanding why helps you navigate the process more effectively.
Liability Protection
The SBA’s primary concern is protecting the loan. In an asset purchase, the buyer (and therefore the SBA’s collateral) isn’t exposed to the seller’s unknown or undisclosed liabilities. The buyer gets clean assets without inheriting the seller’s baggage.
Clear Collateral
In an asset purchase, the lender can take a clear security interest in each identified asset. In a stock purchase, the collateral is the ownership interest in the entity, which is encumbered by all the entity’s existing obligations.
Fresh Start
A new entity with new tax IDs, new accounts, and transferred assets gives the SBA and the lender a clean picture of the acquired business’s financial performance going forward.
SBA Standard Operating Procedures
The SBA’s SOPs explicitly address deal structure requirements. While stock purchases are not categorically prohibited, they require additional scrutiny, more extensive due diligence, and often additional protections (indemnification agreements, escrow holdbacks) that add complexity and cost to the transaction.
When Stock Purchases Make Sense
Despite the SBA’s general preference for asset purchases, there are legitimate situations where a stock purchase is the better — or even the only — option:
Non-Assignable Contracts or Licenses
Some businesses have contracts, licenses, or permits that cannot be transferred to a new entity. Government contracts, certain professional licenses, franchise agreements, and specialized permits may require the original entity to remain intact. In these cases, a stock purchase keeps the contracting entity unchanged.
Complex Contractual Relationships
Businesses with hundreds of customer contracts — such as managed service providers, insurance agencies, or subscription-based businesses — may find it impractical to reassign every individual contract. A stock purchase avoids this administrative burden.
Favorable Lease Terms
If the business has a below-market lease that can’t be assigned but would continue under a stock purchase, maintaining the entity may preserve significant value.
Regulatory Continuity
Businesses in heavily regulated industries (healthcare, financial services, transportation) may need to maintain their existing entity to preserve regulatory approvals, certifications, and compliance history.
S-Corporation or LLC Tax Elections
When a business is structured as an S-corporation or LLC, the tax difference between asset and stock purchases can be minimized through a Section 338(h)(10) election or similar tax treatment. This allows the transaction to be treated as an asset purchase for tax purposes while maintaining stock purchase mechanics — often the best of both worlds.
How Deal Structure Affects Your SBA Loan Terms
The choice between asset and stock purchase directly impacts your SBA financing:
Underwriting Requirements
- Asset purchase: Standard SBA underwriting. Lenders evaluate the business’s cash flow, your qualifications, collateral, and deal terms.
- Stock purchase: Enhanced underwriting. Lenders typically require additional due diligence, including environmental assessments, litigation searches, tax compliance verification, and broader representations and warranties.
Down Payment
- Asset purchase: Standard 10% equity injection (potentially 0% for same-NAICS expansion deals)
- Stock purchase: Some lenders require higher equity injection for stock purchases to offset the additional liability risk — 15-20% is not uncommon
Loan Processing Time
- Asset purchase: Standard processing timelines (45-60 days typical)
- Stock purchase: Often longer processing due to additional due diligence requirements and lender review
Lender Availability
- Asset purchase: Virtually all SBA lenders are comfortable with asset purchases
- Stock purchase: Some SBA lenders won’t do stock purchases at all. Others will, but with restrictions. Having access to a large lender network is critical for stock purchase deals.
Making the Right Choice for Your Deal
Here’s a practical decision framework:
Default to Asset Purchase When:
- The business is a straightforward operation (restaurant, retail, service business)
- Contracts and leases are assignable
- Licenses can be obtained by the new entity
- You want maximum liability protection
- You want the tax benefits of stepped-up basis
- You want the widest selection of SBA lenders
Consider Stock Purchase When:
- Critical contracts or licenses cannot be assigned
- The business has hundreds of customer contracts that would be impractical to reassign
- Regulatory approvals are tied to the entity
- A Section 338(h)(10) election can provide asset-purchase tax treatment
- The seller’s tax situation makes a stock purchase significantly more cost-effective for the overall deal
Always Consult Your Team
The asset vs. stock decision should involve your:
- CPA/tax advisor: To model the tax implications of each structure
- Attorney: To evaluate liability exposure and contract assignability
- SBA lender: To confirm financing availability and terms under each structure
How GoSBA Navigates Complex Deal Structures
Deal structure is one of the areas where GoSBA’s expertise and lender network create the most value for our clients:
- 50+ lender network: When a stock purchase is necessary, we know exactly which lenders accept stock purchase deals and what their specific requirements are — saving you weeks of wasted applications
- $320M+ funded in 2025: We’ve structured deals across every combination of asset purchases, stock purchases, and hybrid structures. There’s no scenario we haven’t seen.
- Free business plan and financial projections: Our professionally prepared plans (valued at $2,500-$5,000) model the financial impact of different deal structures so you can make informed decisions
- 100% free service: Complex deal structures often require more work from your lending partner. With GoSBA, that extra effort costs you nothing — our lenders compensate us at closing
- Expert guidance: We help you evaluate the trade-offs between asset and stock purchases for your specific situation, coordinating with your CPA and attorney to find the optimal structure
Get Expert Deal Structure Guidance — Free
The choice between an asset purchase and a stock purchase can have six-figure financial implications over the life of your business. Don’t make this decision without expert guidance.
GoSBA’s team will evaluate your specific deal, identify the optimal structure, and match you with a lender who specializes in your transaction type — all at no cost to you.
Contact GoSBA today for a free consultation and make sure your deal is structured for maximum benefit and minimum risk.
