Buying a Business? What Are You Buying? Part 1

This blog is about a very specific subject.  When you buy a business, what are you actually purchasing?  It is an important subject for accounting purposes, but it also helps you think about what is really important in your business.

In Part 1, we'll talk about the two primary kind of purchases that happen in a business:  

The first one is a Stock Purchase.  The buyer is purchasing all or part of a company's stock.  It is really no different than buying stocks in public companies, like buying shares of WalMart.

Stock purchases usually take place if the company is larger, or if only a portion of the company is being sold.  For example, inside employees are buying you out, but they are doing it over many years.  

When you own a company's shares, you own everything, past and present.  You own the company's bank accounts, their receivables, their payables.  You own all of the company's assets, known and unknown.  You also own all of the company's liabilities, known and unknown.  

You may ask "what do you mean by unknown"?  Here are some examples.  Unknown Liability:  A warranty claim arises from a product the company sold before you bought the company.  You didn't know about this when you bought the company, but you are still on the hook for it. Unknown Asset:  A class action lawsuit from something that happened long before you bought the company gets settled, and the company gets a check.  You didn't know about it when you bought the company, but it is yours.  In general, unknown liabilities happen more than unknown assets, but both can and do happen.

The second type of company purchase is much more common in the buying of a smaller business.  It is called an Asset Purchase.  With an asset purchase, the things you  are buying are listed.  You aren't buying shares of the company.  Rather, you are buying listed items such as

Equipment
Inventory
The Company Name
A Non-compete from the Seller
Intellectual Property
Goodwill

From an outsider's perspective,  there isn't a noticeable difference.  But from a  financial and technical perspective, it is quite different.

Through the course of my business life, I've bought all or part of 7 businesses.  All of them were Asset Purchases.  My guess is that if we are working together, yours will be too.  An asset purchase is much more common for a business with fewer than 100 employees.

However, when I sold my business to our Employee Ownership Trust, it was a stock sale.

Part 2 covers some of the tax and financial issues related to an Asset Purchase.  It's not real complicated.  It's just the kind of thing that people don't do very often, so it is foreign to them.

If we do some business together, I can guide you through the details of a business purchase, be it a stock or asset purchase.