Why Buyers Disfavor Stock Purchases

Buyers typically prefer to purchase specific assets, rather than the stock of a company, because it is easier to avoid the liabilities of the seller. Loans/liens on the assets can be paid at closing, giving the buyer peace of mind. Buyers can have the assets inspected to make sure they are in good working order or otherwise functional.

It is harder to determine all the liabilities for a whole company when you buy its stock. Will there be a product recall? Have the employees been properly classified? Are there lawsuits that could be brought? Are there hidden debts? Are all the taxes in every jurisdiction correctly filed and paid? Is the equipment well-maintained? Is the customer service good so that major customers are being retained?

In addition to being responsible for all the liabilities of the company’s entire life (known or unknown), stock purchases often have negative tax consequences for the buyer. Sellers typically have depreciated assets over time, resulting in lowered taxes for the seller that the buyer cannot duplicate. This can raise the operating expense of the company for the buyer, compared with the historic financials of the seller.

Sellers want to value the goodwill higher – so they can pay capital gains on it, and buyers want to value the physical assets higher – so they can depreciate them and lower their tax bill.

Please work with an attorney and a CPA when contemplating a stock purchase.