Asset Sale Versus Stock Sale when Selling a Business

Asset Sale Versus Stock Sale When selling a business, the question of whether it's better to structure the sale as an asset or stock sale will come up. Both options have their pros and cons for both the buyer and seller. In an asset sale, the buyer purchases the individual assets of a business, while the previous owner retains ownership of his or her corporation. In this scenario, a buyer would create a new corporation (or bring in their own). In a stock sale, the buyer purchases the owner's corporation as well, and continues operating the business through said corporation. There are pros and cons of each option for both parties. The main concerns when considering either an asset or stock sale are the tax implications for each party, and potential liabilities if taking over an existing corporation.  

Asset Sale

Pros and Cons of Asset Sale In an asset sale, the seller retains possession of their corporation, while the buyer purchases the physical and intangible assets of the company, such as:
  • equipment
  • fixtures
  • leaseholds
  • licenses
  • goodwill
  • trade secrets
  • trade names
  • telephone numbers
Net working capital such as the following are also usually included in an asset sale:
  • accounts receivables
  • inventory
  • prepaid expenses
  • accounts payable
  • accrued expenses
  Asset Sale from a Buyer's Viewpoint An asset sale is generally preferred by buyers because the IRS allows a buyer to “step-up” the company’s depreciable basis in its assets. This allocates a higher value for assets that depreciate quickly (like equipment, which typically has a 3-7 year life) and lower values on assets that amortize slowly (like goodwill, which has a 15 year life). This reduces taxes sooner and improves the company’s cash flow during the vital first few years of taking over a business. Asset sales are generally also preferred by buyers due to the reduced liability, such as liability from product issues, contract disputes or employee lawsuits. A downside to an asset sale for buyers is that certain assets will be more difficult to transfer because of issues with assignability, legal ownership, and third-party consents. This can include intellectual property, contracts, leases, and permits. Obtaining consents and refiling permit applications can take much longer than if the buyer were to just take over the current corporation. Asset Sale from a Seller's Viewpoint Sellers pay higher taxes on asset sales because while intangible assets, such as goodwill, are taxed at capital gains rates, hard assets can be subject to higher ordinary income tax rates. Furthermore, if the entity sold is a C-corporation, the seller faces double taxation. It is first taxed when selling the assets to the buyer, and then taxed again when proceeds transfer outside the corporation. An important reason why seller's often choose an asset sale is the improved marketability of the opportunity, being more attractive to buyers. Approximately 70% of business sales are structured as assets sales according to DealStats.  

Stock Sale

Pros and Cons of Stock Sale With a stock sale, a buyer purchases the stock of a seller's corporation, taking over ownership of the seller’s legal entity. The list of assets and liabilities acquired by a buyer in a stock sale tend to be similar to those of an asset sale. If the business is a sole proprietorship, partnership, or a limited liability company (LLC), the transaction cannot be structured as a stock as none of these entity structures include stock. In these cases, owners would sell their partnership or membership interests. Stock Sale from a Buyer’s Viewpoint In a stock sale, a buyer loses the ability to gain a stepped-up basis in the assets so they cannot re-depreciate certain assets. Whatever the basis of the assets (or book value) is at the time of sale sets the depreciation basis for the new owner. This lower depreciation expense generally results in higher future taxes for the buyer, as compared to an asset sale. Additionally, buyers may accept more risk by purchasing a company’s stock, including all contingent risk known, unknown or undisclosed. This can lead to concerns over future lawsuits, environmental concerns, OSHA violations, employee issues, and other liabilities as the new owner takes over the corporation. One way to mitigate some of these potential liabilities is through representations, warranties and indemnifications in the stock purchase agreement. However, a buyer may prefer a stock sale if the business has a large number of copyrights or patents, or significant government or corporate contracts that are difficult to assign. Also, if a business is dependent on a few large vendors or customers, a stock sale can help to keep these contracts in place during the change of hands. While the majority of business sales do tend to be asset sales, larger transactions have a greater likelihood of being stock sales. Stock Sale from a Seller’s Viewpoint Stock sales are beneficial to sellers because all proceeds are taxed at a lower capital gains rate, and in C-corporations there will be no corporate level taxes. Sellers can also be less responsible for future liabilities, such as product liability issues, contract claims, employee lawsuits, etc. However, as mentioned, the purchase agreement in a transaction could shift responsibilities back to a seller.  

To Stock or to Asset Sale?

Ultimately, the deal structure you decide on when selling your business will have an impact on both you and the buyer. It is important to consult with your business intermediaries, legal counsels, and accountants early on in the process to fully understand both options and which would work better in your case. -