Asset Purchase vs. Stock Purchase When Buying a Restaurant
When you buy a restaurant, you can buy the things the business uses, or you can buy the company that owns them. That choice, between an asset purchase and a purchase of the seller’s stock or membership interests, shapes which liabilities you take on, how taxes work for both sides, whether the lease and licenses must be transferred, and how your lender views the deal. Most small restaurant acquisitions are structured as asset purchases, but not all, and understanding why helps buyers and sellers negotiate from a realistic position.
This article explains the restaurant asset purchase vs stock purchase decision in practical terms. It is general information, not legal or tax advice. Both buyers and sellers should work with an attorney and accountant experienced in restaurant transactions.
The Basic Difference
Asset purchase: the buyer, usually through a newly formed company, buys specific assets of the restaurant, such as equipment, furniture, inventory, the trade name, recipes, phone numbers, website and goodwill. The seller keeps its company, along with liabilities the buyer does not specifically agree to assume. The lease is typically assigned to the buyer’s company or replaced with a new lease.
Stock or membership interest purchase: the buyer acquires the ownership interests in the seller’s company. The company continues to exist with all of its assets, contracts, permits, history and liabilities. Only its owners change.
Liabilities: The Main Reason Buyers Prefer Asset Deals
Restaurants can accumulate liabilities that are not obvious from the financial statements. In a stock purchase, those stay with the company the buyer now owns. Examples include:
- unpaid or underpaid sales taxes, payroll taxes or other tax obligations
- wage and hour claims, including issues related to tips, overtime or classification
- customer injury or foodborne illness claims from before the sale
- unpaid vendor balances or disputed invoices
- lease defaults or unpaid charges
- regulatory or licensing violations
An asset purchase generally limits the buyer to liabilities it agrees to assume. That protection is not absolute. In some jurisdictions, certain obligations, particularly unpaid sales and payroll taxes, can follow the business assets to a buyer unless specific tax clearance procedures are followed. Buyers should ask their attorney and accountant what procedures apply and make them part of closing. Our restaurant due diligence checklist covers the records to review.
Taxes: Where Buyers and Sellers Often Disagree
In broad terms, buyers often prefer asset purchases because they can allocate the purchase price among the acquired assets and may be able to depreciate equipment and amortize goodwill over time. Sellers often prefer stock sales because, depending on how their company is organized, the proceeds may be taxed more favorably and some entity-level taxes may be avoided.
How a specific deal is taxed depends on the seller’s entity type, the allocation of the purchase price among equipment, goodwill, inventory and non-compete agreements, and state rules. Because the difference can affect each side’s net result, structure and price are often negotiated together. Both parties should model the tax outcome with their advisors before finalizing terms.
The Lease
In an asset purchase, the buyer’s company needs the landlord’s consent to an assignment or a new lease. In a stock purchase, the tenant entity does not change, but many leases treat a change in ownership or control as an assignment requiring the landlord’s consent. Buyers should not assume a stock purchase avoids landlord approval. Review the lease language carefully. See our restaurant lease checklist for buyers.
Licenses and Permits
Restaurants operate under business licenses, health permits and, where alcohol is served, a liquor license. In an asset purchase, many of these must be transferred to or reissued in the name of the buyer’s company. In a stock purchase, some permits may remain with the existing company, though regulators may still require notice of an ownership change or approval of new owners.
Liquor licenses deserve particular attention. Rules differ significantly by state and locality, and the process for transferring a license or obtaining a new one can affect whether a deal is structured as an asset or stock purchase and how long it takes to close. Confirm the process with your attorney early.
Employees
In an asset purchase, the seller’s company typically ends its employment relationships at closing, and the buyer’s company hires the staff it wants to retain. That creates an opportunity to set new payroll practices, but it requires planning to avoid disrupting service. In a stock purchase, employees remain employed by the same company, along with any existing employment obligations, accrued benefits and practices.
Contracts and Accounts
Vendor agreements, equipment leases, point-of-sale and online ordering accounts, delivery platform accounts, and gift card programs must be transferred or re-established in an asset purchase. In a stock purchase, many stay in place, though some contracts include change-of-control provisions. Equipment that is leased rather than owned is not part of the assets being sold, and buyers should confirm which items are owned outright.
Gift Cards and Customer Obligations
Outstanding gift cards and loyalty rewards are obligations to customers. In an asset deal, the parties should agree whether the buyer will honor them and whether the price will be adjusted. In a stock deal, those obligations generally remain with the company. Either way, honoring them is often important for customer goodwill.
Financing Implications
Many lenders prefer asset purchases for small restaurant acquisitions because the collateral and liabilities are clearer. Financing is available for both structures, depending on the lender and the program. Considerations include:
- SBA programs can finance both asset and stock purchases, subject to program rules on eligibility and ownership changes. See SBA loans for restaurants.
- In a stock purchase, lenders examine the company’s history, liabilities and tax status more closely.
- The allocation of the purchase price affects the collateral picture.
- Seller financing can be used in either structure. See restaurant seller financing.
Comparing the Two Structures
- Liabilities: asset purchases generally limit assumed liabilities; stock purchases carry the company’s history.
- Taxes: buyers often benefit from asset purchases; sellers often prefer stock sales; specifics require professional advice.
- Lease: landlord consent is typically needed in both, depending on the lease language.
- Licenses: asset purchases usually require more transfers or new issuance; stock purchases may still require regulatory notice or approval.
- Employees: asset purchases involve rehiring; stock purchases continue existing employment.
- Financing: available for both, with more scrutiny of company history in stock deals.
Frequently Asked Questions
Are most restaurant sales asset purchases?
Asset purchases are common in small restaurant sales because they help buyers limit exposure to prior liabilities, but stock purchases are also used when licenses, contracts or tax considerations make them preferable.
Can I avoid the seller’s unpaid taxes by buying assets?
An asset purchase helps, but some tax obligations can follow the assets in certain jurisdictions unless clearance procedures are followed. Ask your advisors.
Does a stock purchase avoid landlord approval?
Not necessarily. Many leases require consent to a change in ownership or control.
Financing Your Restaurant Acquisition
US Professional Funding helps qualified buyers finance restaurant acquisitions structured as asset or stock purchases, including goodwill, equipment within the transaction, owner-occupied real estate where appropriate and working capital. Learn more about our restaurant acquisition financing.
