It’s ironic. When you purchase an existing business from someone else, you’re typically not buying the business itself. You only purchase its assets.

Why? You want to get a clean start for the business, without inheriting the problems of the business’ former owner.

If you buy a restaurant, for example, you want to acquire the restaurant equipment, contents of the restaurant, ownership of the brand, and the lease on the property. You want to AVOID acquiring the contracts, liabilities, and other obligations of the former owner. As the new business owner, you’d typically form a limited liability company (LLC) or corporation and transfer the former owner’s assets into possession of the new business entity.

This is referred to as an “asset purchase.” Advantages of asset purchase include:

  • Starting your own credit history (you do not inherit any negative credit history or unfavorable workers’ compensation history).
  • Starting your own obligation to employees. You don’t inherit accrued vacations and other employment responsibilities that the former owner had; you start anew.
  • Full depreciation of equipment, realty, and other assets. Part of the purchase price is allocated over the various assets acquired (follow the instructions to IRS Form 8594, Asset Acquisition Statement, to make this allocation). This allocation fixes the basis of assets; basis is the amount that can be depreciated. Basis is also used to determine gain or loss when the assets are disposed of.

This means that when you initiate an asset purchase, you have to:

  • Establish yourself with customers and suppliers (although you usually have a head start by showing that you are the successor to the former owner).
  • Rehire staff and create your own compensation packages for the team.
  • Negotiate new leases and contracts.
  • Apply for business licenses  (these do not transfer to you as part of the asset sale).

It may cost more to buy an existing business than to start one from the beginning, but the improved odds of success may be worth the added cost.

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