Business Credit News » Blog Archive » How to Buy a Business, Part 2

Business Credit News » Blog Archive » How to Buy a Business, Part 2

May 20, 2010

In Part 1 of this series, we reviewed the process of buying a business from a sole proprietor or a partnership. Part 2, focuses on the initial steps of buying a business from a corporation.

You will recall that buying a business from a sole proprietor or a partnership involved making a decision about buying the entire business or buying just the assets of the business. That same decision exists when buying a business from a corporation.

A buyer can purchase the entire business, or purchase all or part of the assets from the corporation. When purchasing a corporation that owns a business, the buyer simply purchases all the stock of the corporation. Be sure to purchase all the stock or the buyer will not be the 100% owner; remember the stock certificates of the corporation represent ownership, so obtain all the certificates. Given the choice of an asset purchase or purchasing the entire company, which makes the most sense?

Just like in Part 1, an asset purchase usually makes more sense economically and it reduces liabilities. Purchasing assets means the corporation’s liabilities remain with the corporation and do not flow to the buyer.

Purchasing assets allows the buyer to be selective about which specific assets the buyer wants. Buying the entire company means the buyer gets all the assets, even though the buyer may not need or want them.

Purchasing assets allows the buyer to reasonably assign higher values to the newly purchased assets, which in turn allows for higher depreciation expense resulting in tax savings.

Asset purchases typically allow for additional tax savings such as the IRS Section 179 deduction which permits deductions for purchases of certain equipment and assets. If the number of shareholders is small enough, it is best to have all the shareholders approve of and sign the purchase order. A disgruntled shareholder may slow the closing of the sale.

Even though the bylaws may allow the board to sell, it is potentially less problematic if all the shareholders and board members sign off. In addition to the purchase order, a Corporate Resolution Authorizing a Sale should be signed by shareholders and directors. There is an added benefit when shareholders sign the purchase agreement; they can be personally held liable for any misrepresentations or breaches in the purchase contract.

In Part 3 we will explore the liabilities you should be aware of before buying a business.

Dave Von Holten
Co-Founder, Business Credit Services, Inc.