Why an Asset Purchase Usually Makes the Most Sense

Most entrepreneurs structure their purchase of an existing business or franchise as an asset purchase. This is because it is fairly easy to purchase the assets free and clear of liabilities, and to keep the company’s “issues” with the seller. This way, the buyer doesn’t inherit potential or unknown liabilities, such as contract disputes, employee disputes, warranty issues or product liability.

If the seller is a sole proprietor, there is no stock or membership interest to purchase, so the purchase has to be an asset purchase.

In addition, there are significant tax benefits to the buyer in purchasing assets instead of stock.

IRS guidelines allow asset buyers to "step-up" the company's depreciable basis in its assets. Assets that depreciate quickly - such as equipment - can be allocated a higher percentage of the purchase price, and slower depreciated assets can be allocated a lower value. This reduces taxes and improves the buyer’s cash flow.