Stock vs. asset practice sale: Who cares?
How a veterinary practice is sold and over what time frame usually determines whether the sale is an "asset" or "stock" sale. Now let's get into the details.
What's the difference?
Easy-peasy. In a stock sale, the veterinary hospital as a legal entity (or part of it) is being sold—the buyer is buying shares or units of the business as a whole, including both assets and liabilities. This would be akin to you buying shares of IBM to expand your investment portfolio.
In an asset sale, the buyer is buying individual assets (or a bundle of them)—goodwill, equipment, inventory, maybe even the real estate and more. Typically, the buyer doesn’t take on any of the liabilities of the practice and creates a new legal entity into which these newly acquired assets go.
Why pick one, not the other?
While technically there might be a choice, how it’s done usually depends on the practice's business type, who's buying and how long the process will be.
If someone is buying 100 percent of the practice, it's almost always an asset sale—that’s just how it's done.
If someone's buying in at less than 100 percent, it’s almost always a stock sale. It’s not reasonable to think that a practice owner would go through the trouble of dissolving her business's legal entity so an associate could buy some of the assets and then form a new, jointly owned practice.
Why should you care about this issue? A big reason is taxes. Typically, buyers want to buy assets, and sellers want to sell stock, because an asset sale typically shakes out better tax-wise for the buyer, and a stock sale works better for a seller. Your mileage may vary.
If it’s a 100 percent practice sale, there's got to be a really, really good reason for the buyer to agree to buy stock. Because ...
Where do liabilities come in?
If you buy shares, the price you pay will have been reduced to reflect the financial impact of any existing liabilities. The hairy part comes with liabilities you don't know exist! If you buy 100 percent of the shares of a business, you just inherited all of its liabilities, known and unknown. Surprise! Sale's gone through, and you find out the corporation owes $20,000 to a vendor that wasn’t on the books. Or maybe the state sales tax auditors come calling and discover the practice didn't pay sales tax for the past six years. (P.S. Asset buyers, talk to your attorney before you buy—buying assets isn’t a "Get out of jail free" card—some liabilities may still follow you.)
If you're the buyer, your attorney should include a section in the purchase contract that indemnifies you in case these kinds of issues crop up after the sale is finalized. However, you’re on the hook first and you’ll have to go after the seller to enforce the contract. Lots of luck with that one.
It's a thousand times better to do your due diligence and never be in this situation in the first place. An attorney and accountant with veterinary experience can help you work through the process so it’s fair for all involved.