Partner
Purchasing a Business: Should You Consider Buying Assets or Shares?
When buying a business in California, buyers typically choose between two common methods: purchasing shares or purchasing assets. While share purchases often seem more straightforward, asset purchases can provide distinct advantages, making them a preferred option in many cases. However, they also come with potential complexities that must be considered carefully.
Advantages of an Asset Purchase
Opting for an asset purchase can offer several key benefits to buyers, particularly those looking to minimize risk and optimize tax advantages. These benefits include:
1. Avoidance of Shareholder Appraisal Rights
In California, the sale of all or most of a business’s assets generally requires a majority vote of its shareholders. However, unlike share purchases, asset sales are not subject to the appraisal rights of dissenting shareholders, allowing transactions to proceed with fewer legal hurdles.
2. Selective Asset Acquisition
An asset purchase allows buyers to acquire only the specific assets they wish to own while avoiding unwanted liabilities. This is especially beneficial in California, where businesses must navigate complex regulatory landscapes, environmental liabilities, and contractual obligations. By cherry-picking assets, buyers can reduce exposure to risks associated with prior business operations.
3. Tax Benefits Through Purchase Price Allocation
Buyers in California can allocate the purchase price among different assets to reflect their fair market value, unlocking two primary tax advantages:
- A step-up in tax basis, which can increase deductions when assets are later sold.
- Higher depreciation and amortization deductions, reducing taxable income and leading to future tax savings.
For businesses acquiring equipment, intellectual property, or other depreciable assets, these tax benefits can result in significant long-term savings.
4. Avoidance of Double Taxation for Certain Entities
If the target business is structured as an S-corporation, LLC, or partnership, an asset purchase can help avoid double taxation. Instead of profits being taxed at both the corporate and individual levels (as with C-corporations), income from an asset sale can often be taxed only once, reducing the overall tax burden for buyers.
Disadvantages of an Asset Purchase
Despite the advantages, asset purchases also present challenges that can complicate the transaction process. Buyers should weigh these factors carefully before proceeding.
1. Complexity in Third-Party Consents
Asset purchases frequently require third-party approvals, including:
- Lease agreements for commercial properties
- Contract assignments with vendors or clients
- Permit and license transfers, particularly in regulated industries like healthcare, construction, and hospitality
In California, where stringent regulatory requirements exist for many business sectors, obtaining these consents can lead to delays or additional costs.
2. Need for Precise Asset Identification
Unlike a share purchase, where the buyer acquires the entire company as-is, an asset purchase requires careful delineation of the specific assets being transferred. This is especially true when acquiring a subsidiary or division of a larger company, where some assets may be shared across multiple business units. Legal negotiations over shared assets can add layers of complexity.
3. Double Taxation for C-Corporation Sellers
If the target business is structured as a C-corporation, an asset sale may trigger double taxation—once at the corporate level when assets are sold and again at the individual level when proceeds are distributed to shareholders. This can discourage sellers from agreeing to an asset purchase and may require additional negotiations to structure the deal in a tax-efficient manner.
4. Potential Fraudulent Conveyance Risks
California law protects creditors against fraudulent transfers that leave a seller unable to meet its financial obligations. If the seller transfers assets without retaining sufficient funds to cover its debts, creditors may challenge the transaction, putting the buyer at risk of legal disputes or even transaction reversal.
Why Work with Schneiders & Associates?
While less than 20% of all acquisitions are structured as asset purchases, this method remains a powerful tool for buyers seeking greater control over their investment and tax advantages. By carefully evaluating both the benefits and risks, buyers can make informed decisions that align with their financial and strategic goals.
Whether you’re acquiring a small business or expanding an existing enterprise, Schneiders & Associates is here to guide you through the process. Contact our office today to schedule a consultation and discuss how we can assist with your business acquisition needs.