When a Stock Purchase Makes Sense

Sellers often prefer a stock sale (or membership interest sale for an LLC) because they pay capital gains tax on the profit of the sale, instead of income tax. Capital gains tax rates are usually less than income tax rates. The seller can also be indemnified from the buyer for business liabilities, so they can walk away completely from the business and its problems.

As we discussed last week, the stock purchase has negative tax consequences and heightened liability for the buyer.

But there are times where it makes sense to structure a deal as a stock purchase.

Generally, we see buyers structure deals with a stock purchase when there are key contracts of the business that need to transfer to the new owner, the seller is certified in a particular area, or the buyer wants to keep the seller's EIN.

For example, if you want to buy a company that is approved as a government contractor or has a key contract with someone like AT&T that a startup business would not be qualified for, it may make sense to buy the stock and those contracts/approvals.

Again, this is a time where it makes sense to work with a lawyer and accountant.