Asset Sale vs. Stock Sale
When I first learned that there are two different ways to structure the sale of a business, I rolled my eyes a said, “Of course. Because why not make the M&A process even more complicated? I guess we should be thankful it’s only two?”
Jokes aside, there are important differences between a stock and asset sale. And they both hold value depending on the type of business looking to be acquired. Generally, there is a conflict between the buyer and seller because more often than not, buyers prefer asset sales and sellers prefer stock sales due to various tax implications, potential liabilities, and asset depreciation.
An asset sale is the purchase of individual assets and liabilities. A stock sale is the purchase of the owner’s shares of a corporation.
In order for a stock sale to even be considered, a company cannot be a sole proprietorship, a partnership, or a limited liability company (LLC), due to the lack of stock in these types of entity structures. Only if a business is a regular C-corporation or as a sub-S corporation can the buyer and seller decide whether to structure the deal as an asset sale or a stock sale.
In an asset sale, the seller remains the legal owner of the entity and the buyer purchases the individual assets of the company, such as equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, telephone numbers, and inventory.
In this type of sale, the seller typically retains the long-term debt obligations, but the seller also keeps the cash on hand—a cash-free, debt-free transaction. Net working capital is generally included: accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses.
Buyer advantages of an asset sale:
- Obtain higher valued tax deductions for depreciation and/or amortization
- Expend less time, money, and resources on conducting due diligence due to limited unknown liabilities
- Select which employees wanted and not wanted without impacting company unemployment rates
- Force minority shareholders who do not want to sell their shares to accept the terms
- Decide which assets are going and not going with purchase
Generally a simpler transaction, a stock sale allows for the buyer to purchase the company’s stock, therefore obtaining ownership in the seller’s legal entity. The passing of liabilities and assets is very similar to an asset sale because the titles lie within the business, but separate conveyances of each individual asset are not needed. All assets and liabilities not wanted by the buyer will be distributed or paid off prior to the sale.
Buyer advantages of a stock sale:
- Does not have to bother with costly revaluations and retitles of individual assets
- Assume non-assignable licenses and permits without having to obtain specific consent
- Avoid paying transfer taxes
Know that every M&A transaction and every business is unique, requiring a different and specified sale structure. If you are looking to acquire or sell a business, give us a call at 402-998-5288 and we can advise you through the process.
To read more, check out these sources:
Mariner Capital Advisors’s Asset Sale vs. Stock Sale: What's The Difference?
Corporate Finance Institute’s Asset Purchase vs Stock Purchase
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