Asset vs. Stock Purchase: Acquisition Structure for Foreign Buyers

Sergei Tokmakov, Attorney — California Bar #279869

Understanding the Fundamental Difference

When you acquire a US business, you have two primary options. In an asset purchase, you buy specific assets of the company - equipment, inventory, customer contracts, intellectual property, and goodwill - while the seller retains the legal entity. In a stock purchase, you buy the seller's ownership interest (shares or membership units), acquiring the entire entity with all its assets, liabilities, contracts, and history.

For most foreign investors acquiring small to mid-sized US businesses, I recommend an asset purchase. But there are important exceptions where a stock purchase makes more sense, particularly for businesses with valuable contracts, licenses, or when the seller insists on it.

Asset Purchase

You cherry-pick what you want to buy and leave behind what you do not.

Select specific assets to acquire
Generally exclude pre-existing liabilities
Step-up tax basis on acquired assets
May require contract reassignment
Easier due diligence scope
New entity formation required

Stock Purchase

You buy the entire company, inheriting everything it owns and owes.

Acquire the complete legal entity
Inherit all liabilities and obligations
No step-up in asset tax basis
Contracts often transfer automatically
More extensive due diligence needed
Existing entity continues operations

Detailed Comparison for Foreign Investors

Factor	Asset Purchase	Stock Purchase
Liability Protection	Generally protected from pre-acquisition liabilities	Inherit all known and unknown liabilities
Tax Basis	Step-up to fair market value (better depreciation)	Carry-over basis from seller
Seller Tax Treatment	Seller often faces higher taxes (ordinary income on some assets)	Seller typically prefers (capital gains treatment)
Contract Transfer	Requires consent and assignment	Usually transfers automatically with entity
Licenses & Permits	Often must reapply for new licenses	Usually continue with entity
Due Diligence Scope	Focused on specific assets being acquired	Must review entire company history
E-2 Visa Eligibility	Clear investment in new enterprise	Works if properly structured
CFIUS Considerations	May still trigger review based on assets	May trigger review based on entity
Employee Transfer	Must offer new employment (can be selective)	Employment continues seamlessly
Negotiating Leverage	Buyer typically has advantage	Seller typically has advantage

Why I Usually Recommend Asset Purchases for Foreign Buyers

1. Liability Protection Is Critical

As a foreign investor, you may not have visibility into a US company's full litigation history, environmental issues, tax disputes, or undisclosed liabilities. In an asset purchase, these generally remain with the seller's entity. In a stock purchase, you inherit everything - including liabilities the seller may not have disclosed or even known about.

2. Tax Basis Step-Up Benefits

When you purchase assets, you get a "stepped-up" tax basis equal to the purchase price. This means higher depreciation deductions on equipment, buildings, and amortization of goodwill over 15 years. These deductions reduce your US taxable income, which is particularly valuable for foreign investors subject to fixed withholding rates.

3. Clean Start with Your Own Entity

An asset purchase requires you to form a new US entity (typically an LLC or corporation) to hold the acquired assets. This gives you a clean corporate structure, proper documentation, and the opportunity to establish relationships with US banks from the beginning - all important for foreign investors.

When Asset Purchase Works Best

Franchises and small retail businesses where you want the customer base but not the history.

Manufacturing or distribution companies where equipment and inventory are the primary assets.

Businesses with potential litigation exposure or unclear liability history.

When the seller is willing to accept asset purchase treatment (often with a price adjustment).

When Stock Purchase Makes Sense

Despite my general preference for asset purchases, there are situations where buying the stock (or membership interests) of an existing entity is the better choice:

Non-Assignable Contracts or Licenses

Some businesses hold contracts or licenses that cannot be assigned to a new entity. Government contracts, certain franchise agreements, and professional licenses often fall into this category. If the business's value depends heavily on these, a stock purchase may be necessary.

Real Estate with Favorable Financing

If the target company owns real estate with an attractive mortgage (low interest rate, assumable terms), acquiring the entity preserves that financing. New financing for foreign buyers often carries higher rates and stricter requirements.

Seller Insistence

Sellers of C corporations strongly prefer stock sales because it avoids double taxation. If the seller insists on a stock sale, you may need to negotiate a lower purchase price to account for your increased risk and reduced tax benefits.

Stock Purchase Protections

If you must do a stock purchase, insist on comprehensive representations and warranties from the seller, meaningful indemnification provisions with escrow holdbacks, and consider representation and warranty insurance for larger transactions.

Special Considerations for Foreign Investors

E-2 Treaty Investor Visa

Both asset and stock purchases can qualify for E-2 visa purposes, but the documentation requirements differ. In an asset purchase, you demonstrate that you invested in creating or purchasing a new enterprise. In a stock purchase, you must show you are taking over an existing enterprise with plans for development and direction.

CFIUS Review Possibilities

The Committee on Foreign Investment in the United States (CFIUS) may review acquisitions by foreign persons regardless of structure. However, certain asset acquisitions involving critical technology, infrastructure, or sensitive personal data of US citizens can trigger mandatory declarations. See my CFIUS screening guide for details.

State Tax Implications

Some states impose bulk sales taxes or transfer taxes that differ based on acquisition structure. California's bulk sale law, for instance, requires specific notices and may hold buyers liable for seller's unpaid taxes unless proper procedures are followed.

Successor Liability Exceptions

Even in asset purchases, certain liabilities can follow you as the buyer under "successor liability" doctrines. These include environmental contamination, product liability for previously sold products, pension obligations, and some employment-related claims. I address these specifically in purchase agreements for foreign clients.

Structuring the Acquisition

Typical Asset Purchase Structure for Foreign Investors

Form a new US entity (Delaware or state of operation) to be the acquiring company
Negotiate and execute an Asset Purchase Agreement (APA)
Complete due diligence on assets being acquired
Obtain required third-party consents for contract assignments
Apply for new licenses and permits as needed
Close and fund the transaction
File UCC-3 termination statements for released liens
Record any real property transfers

Typical Stock Purchase Structure

Negotiate and execute a Stock Purchase Agreement (SPA)
Conduct comprehensive due diligence on the entire entity
Obtain any required regulatory approvals (CFIUS, industry-specific)
Negotiate representations, warranties, and indemnification terms
Set up escrow for post-closing claims
Close and transfer shares/membership units
File change of ownership notices as required

Need Help Structuring Your Acquisition?

I work with foreign investors to structure business acquisitions that protect your investment and support your visa goals.