Asset Purchase Vs Stock Purchase: Which Is Right For Your SBA Deal

The Short Version

This is general information, not tax or legal advice. The right structure depends on your deal, so work with a CPA and an attorney who handle acquisitions.

SBA Allows Both Structures

SBA's rules for buying a business let loan proceeds fund a change of ownership through either a stock purchase (including a stock redemption) or an asset purchase. One condition applies to asset deals: to count as a change of ownership, you must be buying all or substantially all of the seller's business assets and continuing its operations. If you buy only some equipment and start something different, the lender may treat it as a start-up instead, with start-up rules.

The other ground rule: a 7(a) loan cannot be made only to an individual. The business must be the Borrower or a Co-Borrower in every structure.

Who Signs The Loan In Each Structure

SBA spells out the borrowers for an Initial Acquisition, where you are buying a business you did not already own:

• Asset purchase. Your acquiring company, often a new LLC formed for the deal, is the Borrower. If the business being acquired will continue to exist as a separate entity, both are Co-Borrowers.
• Your company buys 100% of the stock. The acquiring company is the Borrower. If the target continues as a separate entity, which it usually does in a stock deal, the target is a Co-Borrower.
• You personally buy 100% of the stock. You and the business you are buying are Co-Borrowers, and both of you sign the note jointly and severally.

Separate from who signs the note, anyone who will own 20% or more of the business after the sale must give an unlimited personal guaranty. That rule is the same in both structures. If you are buying with others, see buying a business with a partner.

Liabilities: The Biggest Difference

In an asset purchase, you pick the assets you are buying and the liabilities you agree to take, and everything else stays with the seller's old company. Past tax bills, old lawsuits and claims from former employees generally do not follow you, although some liabilities, like certain sales tax and payroll tax obligations, can follow the assets under state law. Your attorney will check.

In a stock purchase, you own the company, so you own its past. Anything it did before closing is still its problem, and now yours. Buyers protect themselves with representations and warranties from the seller, indemnities and deeper diligence. See purchase agreement basics and the due diligence checklist.

Existing debt works differently too. In an asset deal, the seller pays off its own loans and the liens are released at closing. In a stock deal, the company's debt stays with the company unless it is paid off. SBA treats paying off the business's existing debt as part of an Initial Acquisition as part of the purchase, not a refinance. The lender's valuation scope has to say whether the deal is an asset or stock purchase and list any debt you are assuming, so decide early.

Contracts, Licenses And Leases

This is where stock purchases earn their keep. Some businesses run on things that are hard to transfer:

• Customer contracts that cannot be assigned without consent
• Government contracts and vendor registrations
• Professional or regulatory licenses that take months to reissue
• A lease with a landlord who will not consent to an assignment

In a stock purchase, these often stay with the company because the company itself does not change. Many contracts and leases have change-of-control clauses, though, so you may still need consents. In an asset purchase, you need assignments or new agreements before closing. Either way, the lender takes a lien on all assets you acquire, including transferable licenses like a liquor license, so the lender cares how they move too.

Franchises add a franchisor approval to either structure. See buying a franchise resale with an SBA loan.

The Same Deal, Two Ways

Here is a $1,400,000 security systems company. The money works the same in either structure. What changes is who signs and what comes with the business.

The difference shows up elsewhere. In the asset deal, the monitoring contracts need to be assigned to your company. In the stock deal, they stay with the company, but you inherit its history, so your purchase agreement needs stronger protection.

Taxes In Plain English

This is general information, not tax advice. Talk to a CPA before you choose a structure.

Asset purchases usually give the buyer a fresh tax basis in the assets equal to the price paid. Buyer and seller allocate the price across asset classes and report it to the IRS on Form 8594. Goodwill and most other acquired intangibles are generally amortized over 15 years under Section 197, and equipment can often be depreciated faster. That makes asset deals attractive to buyers.

Stock purchases usually leave the company's tax basis where it was, so you get less in future deductions. Sellers, especially owners of C corporations, often prefer stock sales because they can avoid a second layer of tax. Some deals use tax elections that treat a stock purchase like an asset purchase for tax purposes. Your CPA will tell you whether one fits.

Because buyer and seller often want different structures for tax reasons, the structure itself becomes a negotiating point. Read tax basics for buying a business and negotiating price and terms.

How To Choose

An asset purchase usually fits when:

• The business is small and its contracts are easy to assign
• You want a clean break from the seller's history
• The tax step-up is worth a lot to you

A stock purchase usually fits when:

• Key contracts, licenses or the lease cannot easily be transferred
• The seller insists on it for tax reasons and you get price or terms in return
• The company has a clean history you can verify in diligence

In our experience, most small business acquisitions financed with SBA loans are asset purchases, but plenty of stock deals close every year. Here are two closed acquisitions from different industries:

Real loans we placed. Borrower and lender names are kept private. See all closed deals.

Whichever structure you choose, settle it in your letter of intent, because it changes the valuation scope, the borrower setup and the closing documents. When you are ready, request a pre-qualification letter and read the full SBA business acquisition loan overview.