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Asset Sale vs Stock Sale Overview
How do you decide between a stock sale or an asset sale?
In business, there are many situations where the decision of going through a stock vs asset sale can make an important difference for the buyer and seller.
Typically, buyers tend to prefer buying assets (or asset sales) and sellers prefer selling stock (stock sale).
According to market research, it appears that approximately 30% of transactions are structured as stock sales whereas 70% include some form of an asset sale.
If you are looking to understand the difference between a stock vs asset deal, you are at the right place.
Keep reading as I will provide you a quick but comprehensive overview of what’s an asset sale and stock sale and then tell you about the key considerations.
Without further adieu, let’s get into it.
Difference Asset Sale vs Stock Sale
What’s the difference between asset sale versus stock sale?
An asset sale refers to the purchase of specific assets and liabilities associated with that asset.
On the other hand, a stock sale is the purchase of another person or entity’s stock in a corporation or business entity.
Keep in mind that for a transaction to be structured as a stock sale, you need to have a corporation that has issued and outstanding stocks to be able to purchase or sell.
S-Corporations and C-Corporations have the option of structuring a deal as a stock sale or asset sale.
Sole proprietorships, partnerships, or limited liability companies cannot structure a deal as a stock sale as they do not have stocks to sell (partnerships and LLCs can sell partnership or membership interest).
What Is Asset Sale
An asset sale is when a buyer purchases, and a seller sells, specific assets while retaining full possession of the stocks in the corporation.
Asset sales can include a broad range of assets such as real estate property, equipment, fixtures, tangible goods, trade secrets, inventory, intangible assets, and others.
Businesses selling assets may also sell their working capital where net working capital may include inventory, accounts receivable, accounts payable, accrued expenses, prepaid expenses and other.
Cash transactions typically do not include the target company’s cash and the seller keeps long-term debt (this is referred to as cash-free and debt-free).
What Is Stock Sale
A stock sale is when a buyer purchases the outstanding and issued shares of the selling entity directly from its shareholders.
In the context of a stock sale, the parties can negotiate what assets to leave within the legal entity before the transaction is consumed or “closed”.
The selling entity may sell, transfer, or dispose of unwanted assets and liabilities before concluding the transaction so the buyer can purchase the shares of a company that contains the assets it wishes to purchase.
Asset vs Stock Deal Pros And Cons
What are the advantages and disadvantages of going through with an asset versus stock sale?
Asset Sale Advantages For Buyer
From a buyer’s perspective, the advantages of an asset sale are that it can benefit from more advantageous tax treatment where it can step-up the company’s depreciable basis and allocate a lower value on assets that amortize more slowly.
Lowering taxes in the first few years following an asset transaction will help improve the buyer’s cash flow and better absorb the purchase cost.
The buyers also benefit from other key advantages in purchasing assets as they will have a better understanding of what they are buying, can look up the asset creditors, and pay the right price.
In an asset sale, buyers have the ability to pinpoint the exact nature of liabilities they will be willing to assume in a transaction thereby limiting their exposure to large and unknown future liabilities.
Since asset transactions have less risk for the buyer, another advantage is that the due diligence process may be less time-consuming and less costly.
Asset Sale Disadvantages For Buyer
An asset deal may have disadvantages for the buyer as well.
In some cases, purchasing assets may actually be more difficult than purchasing stocks.
There are certain types of assets that may generally require third-party consent before the buyer can sell them to another such as sale of intellectual property rights or the assignment of contracts.
Buyers may struggle to get the required third-party consent to consume the transaction in a timely manner and in some cases, deals fall through due to the inability to get the proper consent.
In the context of asset sales, there may be some contracts that will need to be renegotiated with customers or suppliers.
It’s also possible that some assets may need to be retitled for the transaction to go through.
Asset Sale Advantages For Seller
Selling assets may be difficult for sellers in certain types of transactions as they will need to potentially renegotiate contracts with some of their customers, vendors, and suppliers.
Also, if the buyer does not want some assets but others, the seller may be left with unproductive assets in the company or excessive liability.
If the buyer does not want to acquire certain key employees, the seller will need to renegotiate employment agreements creating challenges and perhaps conflict in the selling entity.
The seller may still have assets left over that it will have to liquidate or dispose and clear any further liability associated with them.
Asset Sale Disadvantages For Seller
When selling assets, sellers should be careful about the tax implication of the asset sale transaction.
In fact, asset sales can potentially generate higher taxes for the seller.
Particularly, assets like goodwill can generate capital gain taxes whereas other physical assets may result in higher ordinary income taxes.
The shareholders in the selling entity looking to cash out some of the sale proceeds, will face double taxation as the corporation must first pay business taxes on the sale and the shareholders will then have to pay personal taxes on the dividends paid out.
In some cases, S-Corporations may also face double taxation if they were previously taxed as a C-Corporation (it’s important to consider the applicable tax laws and properly understand the implications of the sale).
Stock Sale Advantages For Buyer
In general, stock sales are simpler to close than asset purchases from a technical point of view.
Essentially, the seller transfers or sells stocks in the selling entity to the buyer.
The transaction takes place between the selling entity’s shareholders and the buyers directly.
Since the business entity is not being touched, the company will keep its assets, leases, contracts, permits, and the business operations remain intact.
Stock Sale Disadvantages For Buyer
In a stock sale, buyers do not have the ability to step up the asset basis or re-depreciate the assets they are purchasing via the legal entity.
Since the assets are not being transacted, the buyer of the legal entity will inherit the depreciation basis of the assets owned by the selling entity along with the book value of the assets at the time the deal is closed.
Another important disadvantage for buyers is that they will assume a greater level of risk in acquiring the stocks of a selling entity.
In essence, the buyer may be surprised with undisclosed claims or unknown liabilities that may manifest themselves after the sale.
For this reason, buyers should ensure that the warranties and representations in the stock sale are clear and complete providing the seller some protection in case of future liabilities and claims affecting the selling entity.
Stock Sale Advantages For Seller
In many cases, sellers prefer to sell the shares of the legal entity allowing them to have the proceeds of the transaction get taxed as capital gains allowing them to pay less taxes in the aggregate.
For C-Corporations, they can completely avoid double taxation as the money is paid directly to the shareholders and not the business (where it will then need to get paid to the business owners via dividends).
Sellers also prefer stock sales as they can pass on most of the responsibilities to the buyers, such as future contract claims, lawsuits, and future liabilities.
Stock Sale Disadvantages For Seller
In some cases, the buyers will not accept to enter into a stock sale if it means that they will inherit all of the seller’s liabilities going forward.
When that happens, some buyers will consume the stock sale but will require that a separate agreement be negotiated where the selling company takes back some liabilities coming through the business entity.
Another important challenge for buyers is to ensure that the stock sale complies with applicable securities laws along with any other applicable law.
If the transaction is not done properly, a private company may end up having to pay severe fines and penalties for violating the securities laws exposing the seller to a potential lawsuit.
Stock vs Asset Sale Process
For both asset and stock purchases, the first step is to start and plan for your due diligence.
Buyers and sellers should engage in a due diligence process to ensure they have all the right information and data in their hands to be able to make a sound and informed sale or purchase decision.
The due diligence for both stock and asset sales is generally similar.
However, in the context of asset sales, the condition and title of the assets become more important whereas the seller’s title to the company stock is more unique to stock sales.
Since buyers will take great risk through stock purchases, the entire process may be more involved.
Asset purchases will usually require more formalities than stock purchases as the seller must convey the title to specific assets.
A stock purchase does have formalities such as assignment consents, board resolutions, and statutory or regulatory approvals, but in general asset transactions may have more formalities.
Asset Purchase vs Stock Purchase Takeaways
So there you have it folks!
What is a stock purchase vs asset purchase?
What are the benefits and drawbacks of structuring a deal as a stock vs asset purchase?
How do you make the right choice between them?
In a nutshell, an asset sale (or purchase) is when a business sells specific assets to another party whereas a stock sale is when the business entity shares are sold to the buyer.
Structuring your deal is important as buyers and sellers tend to have different considerations in a transaction.
There are many factors to consider, such as:
- Tax implications
- Transferability of assets
- Potential for future claims
- Complexity of the transaction
If you are currently involved in an asset vs stock purchase transaction or you are contemplating getting into one, it’s important that you consult with qualified business attorneys, accountants, and other professionals to understand the impact of the transaction.
Now that you know the main differences between asset sale vs stock sale, good luck with your transaction!
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What Is Asset Sale vs Stock Sale
Thank you for taking a moment in your day to read my post on stock deal vs asset deal.
By having an overall point of view on what factors are important in a stock purchase versus asset purchase, I hope you are better equipped in dealing with a transaction you may have at hand.
Remember, this article is intended to give you general information.
Every deal is different and every person’s circumstances are different, so it’s important that you consult the right professionals to make your decisions.
If you enjoyed this article on Stock Sale vs Asset Sale, I recommend you look into the following terms and concepts. Enjoy!
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