Bob, one of my business clients, wants to own a coffee shop. He calls me and tells me he has found one for sale—and in the perfect location. That coffee shop is owned by a corporation. The corporation is really just the owner and his wife, but the corporation is the legal owner of the coffee shop.
I suggest to Bob that we are best off structuring the small business purchase as an “asset purchase sale”, as opposed to a stock purchase. That means we are not purchasing the business itself, but only the assets of the business. For example: Bob wants to buy the chairs, table, the coffeemakers, the goodwill, the recipes. By making his purchase this way, he will avoid most of the liabilities of the coffee shop he is buying. The current coffee shop may owe money to suppliers, taxes, a lawsuit for food poisoning suit or a former employee suing the coffee shop. There are some tax advantages to structuring the deal this way too. Win-win for Bob, right?
So why would anyone want to do a stock purchase (buying the coffee shop itself or the entire corporation)? I tell Bob that if he wants ease in transferring title, there’s a certain expense in starting fresh, and if Bob needs to save a few thousand bucks, then buying the stock would be the way to go. It might eliminate the need to transfer permits, employee agreements and leases, although even with a stock purchase, there might be costs. I warned Bob, permits are often personal to the owner and not the business. If the coffee shop Bob is buying has a liquor license. Bob would not be able to just take that over, he would have to be personally vetted by the liquor authority here in New York. Despite a corporation owning the coffee shop, the current owner probably has a personal guarantee clause in his lease, and the lease would have to be renegotiated anyway.
Bob agrees an asset purchase is the best alternative, the coffee shop owner understands that any purchaser will only want assets and not stock, and we are off and running on the first step to making Bob’s dream a reality.