Volume 1 Issue 2-- September/October 1997
In the previous issue of this Newsletter, we talked about protecting your "List." Continuing with practical advice, let's talk about buying a business.
Too often, little thought goes into exactly what you are buying. Let's say, you know of an incorporated printing business known as PAIN Printers, Inc. ("PAIN"). Now, after 20 years of hard work (and raising children who are now grown and long relocated), you want to buy and run PAIN.
The typical pattern in this situation is to have preliminary discussions with the PAIN principals about how much the business is worth. Blinded by monetary considerations, frequently little, if any, consideration is given to one of the most basic points, namely:
Will you buy the stock or the assets of PAIN?
You may be thinking, "So what? Does it really make any difference whether I buy the stock or the assets of the PAIN business?" The answer is an emphatic "YES!" It makes a very considerable difference, and here's why.
A Stock Purchase
If you buy all of PAIN's stock, here's what you may get, in addition to the underlying assets of the business.
1. Any pending lawsuits and all potential claims, whether known or unknown, which could or may be asserted against PAIN, which might soon come to be thought of as a "Pain in the...."
2. Potential Federal and State tax deficiencies which may come from a tax audit in the future and relate back to years before you purchased the stock.
3. Hidden claims for back wages, OSHA audits, creditor's claims, and an unimaginable number of other, yet-to-be-discovered matters.
Expressed differently, when you buy the stock of an incorporated business, like PAIN, you get all the assets plus any number of yet unopened packages, most of which you would probably prefer to leave locked in the attic. Unfortunately, when, and if, these packages are opened (during a tax audit for example) is beyond your control. Let's explore a way to avoid these hidden claims and pains.
An Asset Purchase
The problems just mentioned should, in most cases, make you prefer an "asset purchase." For openers, there are no hidden liability problems. In an asset purchase, you get only the assets, not the painful hidden claims.
If you buy the assets of PAIN, you receive only the items described in the bill of sale. The list of items purchased will show the printing presses, computers, customer lists, name (assuming you want it), and the land and building, if any. (Generally, putting real estate in such corporations is a bad idea, but more on that in later editions.)
An Asset Purchase Provides Tax Deductions
When you purchase assets (like equipment), you get a tax deduction called "depreciation." Intangible assets, like customer lists and covenants not to compete, can be amortized (deducted) usually over 15 years. Tangible assets are depreciated over their economic useful lives. For example, if you pay $10,000 for a printing press, you, as an "asset purchaser," would be able to depreciate the machine over its useful life, 10 years, and claim a deduction of $1,000 in each of the 10 succeeding years.
Alternatively, if you had blindly purchased PAIN's stock, you would only be entitled to deduct the depreciation the Corporation could have claimed under its prior owner, which may be "zilch" if the stuff is already fully depreciated. Expressed differently, if PAIN couldn't claim further depreciation deductions before the stock sale, then neither can you as the new owner of the stock.
This follows because "all of the corporate attributes, history, and choices are delivered intact to a stock purchaser, like you. As far as government agencies, creditors, and injured parties are concerned, PAIN continues on, even if you change the name after you purchase the stock.
Asset Purchases Free You From Hidden Claims
In addition to asset purchases giving you more tax deductions, they also free you from "hidden claims." There is, however, one exception. If you buy all of the assets of some businesses "in bulk," it is sometimes necessary for you or the seller to contact creditors and advise them on who will pay outstanding bills. Such notice requirements are often referred to as the "bulk sales" law.
Should You Ever Consider Buying Stock?
Occasionally, a business like PAIN will own an asset or license that cannot be easily purchased or obtained independently of the present corporate entity. For example, let's say that PAIN has a valuable land lease from a local airport authority and the only way to get the lease is to buy the stock of PAIN. Then, perhaps, the "only" way you can do business at that valuable location is to purchase the stock and in effect "buy the lease." Or, the corporation may have certain attributes, like unused tax credits, or unassignable contracts that would be lost if the assets were sold.
Next time, we will look at these transactions from the Seller's perspective and other
considerations for selling and buying businesses.
Published by the law firm of Newland & Associates, PLC
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