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Asset Sales or Stock Sales: Determining the Best for Your Business Transaction

 

A business transaction typically comes down to two common sales structures: the asset sale or the stock sale. Asset sales involve the purchase of individual assets and liabilities, leaving the underlying ownership unchanged. Stock sales include the purchase of all or a controlling stake in the owner’s shares of a business and do not involve the assets of the corporation. While these definitions seem cut and dried, they are, in actuality, fairly complex, particularly where tax implications and potential liabilities are concerned.

To make matters more complicated, buyers favor asset sales and seller’s favor stock sales. The success of every business sale and purchase will depend on the careful navigation of each of these transaction structures. This article highlights the advantages and disadvantages of each.

Advantages of an Asset Sale

     • Buyer is able to identify which liabilities it is willing to assume and which ones it does not (like pending litigation or unfavorable contracts).
     • Likewise, the buyer also chooses the assets it wishes to purchase (things like equipment, client lists, accounts receivable, etc.).
     • Buyer avoids problems associated with minority shareholders who refuse to sell.
     • Asset sales are not typically required to comply with federal and state securities laws and regulations.
     • Buyer receives fair market value for the purchased assets on a step-up basis, which typically generates higher depreciation deductions.
     • In some asset sales, the seller can retain business lines and assets within the current corporate structure.

Disadvantages of an Asset Sale

     • All seller’s assets must be re-titled in the name of the buyer, resulting in additional time and paperwork.
     • Problems may arise if the seller has key permits and contracts that can’t be assigned without the consent of the third party.
     • Seller is exposed to higher income taxes on the sale of buildings, equipment, fixtures, and other hard assets and capital gains tax on intangible assets, like goodwill.
     • C-Corporations are subject to tax on the sale of assets as well as the taxes to shareholders upon cash distributions.
     • S-Corporations with built-in gains further complicate the sales structure.

Advantages of a Stock Sale

     • Sellers can walk away from the business, leaving the buyer to slip into their shoes.
     • Buyer can typically secure the seller’s nonassignable contracts, leases, licenses, and permits with the consent of the other party on the document.
     • Stock transactions avoid some or all sales and transfer taxes on asset transactions.
     • Stock sales are normally less complicated, particularly when there are only a few shareholders in the business.
     • Stock sales do not require separate conveyances of each asset as the title of individual assets lie within the corporation.
     • For sellers, all proceeds are taxed at a lower capital gains rate
     • In C-corporations, corporate level taxes are bypassed.

Disadvantages of a Stock Sale

     • Buyers cannot pick and choose their liabilities; they invest in a company as a whole, which includes unknown or uncertain risks. These risks can be alleviated with additional warranties, indemnifications,     representations, and provisions within the purchase agreement.
     • Buyers lose the ability to gain a stepped-up basis in the assets and thereby cannot re-depreciate certain assets.
     • In this a stock transaction, it is often difficult to keep the business lines under the corporation untouched.

 

When considering a sole proprietorship, partnership, or LLC, an asset sale is your only option as these business entities do not have stock. C-corps and S-corps are handled as mutually agreed by the buyer and seller. Although buyers typically prefer asset purchases, they may be willing to agree to stock purchases when there are valuable contracts at stake.

Of course, every business transaction is different. Buyers and sellers should consult with their respective professionals when considering which business sales structure is most appropriate for their needs and goals.

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The Firm Business Brokerage is not a real estate brokerage and therefore the staff will not handle any aspect of the lease, sale or purchase of real estate.