If you are considering buying or selling your company, it is important to understand the few ways you can structure your business transaction.
As a buyer, maybe you wish to sell fully, or perhaps you would like to continue owning a certain number of shares to stay connected to your business. As a seller, you would like to pay the best deal for your business acquisition and get the least liability. In general terms, buyers prefer to buy assets, while sellers prefer to buy stock.
The main difference between an asset sale and a stock sale is that in an asset sale, buyers receive individual assets and liabilities, while in a stock sale, they get the shares of the target company.
It is essential to note that you can structure an asset deal with any kind of business entity, whether it is a Limited Liability Company (LLC), a partnership, a sole proprietorship, or a corporation.
However, regarding stock sales, this type of transaction can only occur with corporations, be it a C corp or an S corp. The reason for this limitation is simply that corporations have stock, which are transferrable shares that represent the ownership of the company. The rest of the business entities, LLCs, Sole Proprietorships, and partnerships are not structured with stock, for they can only proceed with an asset purchase.
Deciding on either an asset sale or stock sale depends on a couple of factors that we are going to discuss below.
An asset sale consists of the purchase of the assets and liabilities of a business, while the seller keeps ownership of the company’s original entity. In an asset sale, the buyer can start a new business with the assets that were purchased, or add them to an existing business. Asset sales are very flexible deals, as buyers can purchase specific items and assume the liabilities that they are comfortable with. At the same time, the seller can continue running the business with the remaining assets and liabilities.
An asset sale means both physical and intangible properties of a company.
Tangible assets can include real estate, inventory, equipment, fixtures, or other physical property.
Intangible assets can be in the form of trademarks, licenses, trade secrets, copyrights, goodwill, leases, telephone numbers, and other intellectual property. Some asset deals include the net working capital, which includes accounts receivable and accounts payable.
When an asset sale includes the whole assets of a company, the purchaser controls the business since he or she holds everything that made the seller’s equity worth something such as intellectual property, goodwill, customer lists, branding, and tangible property.
Generally, asset sales do not include cash. In most asset deals, the seller retains its cash and long-term debt obligations.
Also called equity sale, it occurs when the buyer purchases the shares of a company and thereby gains ownership of the target business. With an equity sale, the buyer also acquires all the company’s assets and liabilities, and the entire established business is transferred to a new owner.
A key difference from an asset sale is that stock sales do not require a deep analysis of each individual asset because the title of each asset lies within the corporation. Assets and liabilities that the buyer desires to omit can be distributed or paid off prior to the sale closing.
Difference between Asset Sale and Stock Sale
Asset sales represent a disadvantage for sellers concerning its tax implications. Some intangible assets are taxed at capital gains rates, while physical assets may be taxed at higher ordinary income tax rates, depending on the state where the acquisition occurs.
Another disadvantage for sellers is that if the company is a C corp, it will face double taxation. First, the selling company will be taxed when selling the assets to the buyer, and then again individual shareholders are taxed on the assets sold.
However, for the taxation issues that an asset sale implies, sellers can reasonably increase their purchase price.
For buyers, asset sales can be more beneficial because the buyers will receive a step-up in basis of the selling company’s depreciable assets. By this, buyers can save taxes in two ways: Depreciation, by allocating a higher price to assets that are subject to lose value with time, such as equipment, and amortization, by assigning lower value to assets that pay off slowly, such as goodwill.
An asset sale can bring benefits in the long-term for buyers, as the step-up improves the company’s cash flow during the vital early years.
Stock sales represent a disadvantage for buyers for the inability to step up the tax basis, which stops them from re-depreciate certain assets.
That results to higher future taxes for the buyer.
While for the sellers, the tax advantage is theirs, because the amount of shares that are sold is treated a capital gain, which receives a much lower tax rate.
In addition, the owners can be taxed as an individual or as an entity, depending on the circumstances.
With an asset sale, buyers inherit the least liability, for they do not acquire issues that the target company may face. Liabilities, such as contract disputes, employee lawsuits, or environmental concerns, remain the responsibility of the company to be acquired. Asset sales also allow the buyer to dictate the liabilities he or she will assume in the purchase. If certain liabilities are significant, unknown, or not stated by the seller, the purchasing party is more likely able to transfer that responsibility back to the seller.
With a stock sale, all the liabilities attached to a company are transferred to the new owner.
Some of the most common liabilities can be debt obligations, which the owners are forced to pay if they structured a stock sale. In order to make sure the target company is a safe acquisition, buyers must conduct due diligence, which reduces significantly their possibility of obtaining a bad deal.
Complexity and other considerations
The process of an asset sale requires the biggest effort from the two forms of acquisition. There are some assets that are diffcult to transfer and require consent from third parties, which increases the time and legal work required for the transaction.
If a stock sale is made, the buyer does not need to put money toward revaluations or retitles of individual assets. This can be a costly process that is required with asset sales.
Also, stock sales are highly recommendable for companies where the business model is relationship based. When the value of a business relies on contracts with other companies or the government, a stock sale helps maintain the value of the business through those relationships.
A stock sale is a better choice when getting a specific asset is critical for the operations of the business. For example, a buyer who would want to purchase a bar in Chicago would be advised to buy the stocks of the company, for getting an alcohol license in this city is difficult.
Deciding whether to structure an asset sale or a business sale can be a complex decision, where several factors must be considered. To ensure you are making the best decision for your acquisition or sale, always have the professional advice of a creative and knowledgeable business attorney who will structure the sale terms to make any disadvantages less impactful.
Not sure whether to structure an asset deal or a stock deal? Our Mergers and Acquisitions attorney will provide you with a personalized consultation.
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