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Stock Purchase vs. Asset Purchase
A stock purchase occurs when the buyer acquires shares of the target company directly from its shareholders. This gives the buyer ownership and control of the entire company, including its assets, liabilities, and contracts. Because the legal entity itself does not change, most contracts, licenses, and permits remain intact, allowing business operations to continue without disruption.
Licensing Agreements for Startups: How to Protect, Monetize, and Scale Your IP
If your startup is built on software, content, data, or inventions, you likely need a Licensing Agreement. Whether you’re giving others the right to use your IP or licensing third-party tech for your own product, a well-drafted agreement is the key to protecting your rights and unlocking revenue.
FAQs
Open allWhen should an owner start planning their exit strategy?
Ideally, exit planning should begin several years in advance. Early preparation increases valuation and ensures smoother negotiations.
What is the best exit strategy for a small business owner?
The right strategy depends on goals. Many small business owners pursue third-party sales or ESOPs, while larger companies often benefit from mergers or acquisitions.
What role does due diligence play in mergers?
Due diligence is the process of investigating financial, legal, and operational risks before closing. It helps identify liabilities, verify valuations, and strengthen negotiation positions.
Do all mergers require regulatory approval?
Not all mergers require government approval, but larger transactions or deals in regulated industries may need clearance from agencies like the FTC, DOJ, or industry-specific regulators.
What is the difference between a merger and an acquisition?
A merger combines two or more companies into one surviving entity, while an acquisition occurs when one company purchases another’s stock or assets.
Are stock purchases subject to taxation?
Yes. For sellers, stock purchases are often taxed at capital gains rates. Buyers typically cannot “step up” the tax basis of the company’s assets, which may affect future deductions.
Can a buyer avoid inheriting liabilities in a stock purchase?
Not entirely. Buyers inherit all liabilities of the company. However, risks can be managed through due diligence, indemnification provisions, and escrow arrangements.
What are the main advantages of a stock purchase compared to an asset purchase?
Stock purchases are simpler to execute because the company remains intact, preserving contracts, permits, and relationships. Asset purchases, while offering liability protection, often require more paperwork and consents.
Are employees automatically transferred in an asset purchase?
No. Buyers must choose which employees to hire and issue new contracts, though they may assume existing benefits or tenure for retention purposes.
Can tax benefits make an asset purchase more attractive than a stock purchase?
Yes. Buyers often gain a stepped-up basis in acquired assets, creating valuable tax deductions.
What is the biggest advantage of an asset purchase?
The ability to avoid inheriting unknown liabilities while selectively acquiring only valuable assets.
Can licensing agreements be terminated early?
Yes. Most agreements include termination clauses, either for breach of terms or for convenience, but the scope of surviving rights (like confidentiality) must be addressed.