Stock (Entity) Purchase
A business acquisition structured as the purchase of ownership in the legal entity itself, transferring the entity's full history of contracts, obligations and liabilities, known and unknown, to the buyer.
Example
A stock purchase of a company later exposes the new owner to an unpaid payroll-tax assessment from before the sale, because the liability belonged to the entity itself.
Important
Sellers often prefer this structure for its simplicity and generally more favourable tax treatment, which is why buyer and seller frequently negotiate over which structure to use.
Related terms
- Asset Purchase — A business acquisition structured as the purchase of specific named assets and goodwill, rather than the legal entity itself, generally leaving known and unknown liabilities of the old entity behind with limited exceptions.
- Due diligence — The work of independently verifying the claims made about an investment before committing money to it - the documents, the counterparties, the registrations and the numbers.
- Disclosure schedule — The document in which a seller lists the exceptions to what they are formally promising - the litigation, the defaults, the contracts that are not on standard terms.
Lessons that explain it
- Buying a small business almost always means buying a job — A small-business purchase is rarely a passive claim on cash flow. Most of what you are paying for is bound up with the seller's own labour, and the legal structure of the deal decides which liabilities move with it. (9 min)
- Franchise royalties and goodwill amortisation both compound quietly over the holding period — Beyond key-person and concentration risk, a small-business purchase carries recurring costs and tax treatment that materially change the price a buyer can justify and the return a seller actually keeps - none of which shows up in a headline SDE multiple. This lesson is general information, not personal tax or legal advice, and rules vary by jurisdiction. (12 min)
All 578 terms in the Investing glossary