Generally, the easiest way for a buyer to purchase a business is through an Asset Purchase Agreement. The buyer is not actually purchasing the business itself. One commentator has described it has buying the seller’s merchandise without buying the store.
Buyers tend to favor asset purchases for several reasons. First, the buyer obtains the seller’s assets without assuming the liabilities of the business. Second, the buyer gets a "stepped up" basis on the assets being acquired which is helpful to the buyer from a tax perspective. (This is where the buyer’s basis for depreciation is the allocated purchase price of the transferred assets). Sound complicated? Trust me it is a good thing for the buyer. Third, the buyer can pick and choose which contracts of the business to assume. Fourth, a buyer may or may not hire the employees of the seller.
Now a seller may want a stock sale, particularly if the business is a C corporation. In this case the buyer is purchasing the business entity itself. If the seller owns a C corporation an asset sale may result in double taxation for the seller. (Never a good thing). Under those circumstances the corporation will pay tax on the gains of the assets sold, and then the shareholders will pay capital gains tax when the corporation is liquidated. But with a stock sale, the seller will only pay the capital gains tax on the sale, generally at a 15% tax rate (at least until 2010).
One point to consider in the negotiation of an asset purchase or stock sale is that the potential tax liability for the seller may be greater than the savings to the buyer. So a seller may want to consider adjusting the purchase price slightly in order to gain the tax savings from a stock sale.
For more information on this subject check out this helpful article from CCH Business Owner’s Toolkit . If you have questions regarding whether you should make an asset purchase agreement or stock sale please be sure to consult your tax advisor and/or a business attorney.