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Transaction Structure: Asset Sale vs. Stock Sale

Lincoln Law Firm Shares Insight

When purchasing or selling a business an initial decision is how to structure the deal.  On a basic level, the two most common structures are (1) an asset sale or (2) a stock sale.[1]  In an asset sale, some or all of the assets may be sold but the underlying ownership of the selling corporation does not change.  In a stock sale, no assets of the corporation are sold, instead the buyer purchases all of or a controlling stake of the ownership interests (i.e. shares) of the corporation in return for cash and/or other consideration to the selling shareholders.

[1] For purposes of this article, this overview is based on the buying and selling entities being corporations or entities taxed as corporations.

Asset Sale

Buyer's Perspective

  • Generally favored
  • Purchase price is allocated among purchased assets and buyer receives a fair market value step-up basis, which generates higher depreciation deductions
  • Buyer can “cherry-pick” which assets and liabilities it will purchase and assume
  • Potentially problematic if seller has key contracts or permits that cannot be assigned without third party consents

Seller's Perspective

  • Generally disfavored
  • Sale of “hard” assets (i.e. buildings, fixtures, equipment, etc.) likely subject to higher ordinary income tax rates
  • If seller is a C-Corporation subject to double taxation (tax to corporation on sale of assets followed by tax to shareholders upon distribution of cash from sale)
  • Further complexities if seller is an S-Corporation with “built-in gains”
  • Does allow seller to retain assets and business lines within existing corporate structure

Stock Sale

Buyer's Perspective

  • Generally disfavored unless assignability issues exist
  • No ability for buyer to receive a stepped-up basis in assets
  • Buyer takes seller’s corporation “as-is” and inherits all liabilities, employee issues and other actions taken by seller in the past, known or unknown
  • Risks can be mitigated by comprehensive representations and warranties by seller’s owners and indemnification provisions in the purchase agreement

Seller's Perspective

  • Generally favored
  • Nothing changes but owners of stock
  • Taxed at lower capital gains tax rates
  • No agreements or permits to transfer
  • More difficult to keep other business lines under corporation intact

This is a very high-level summary of only a few of the considerations.  Additional factors will be relevant which may affect the benefits and ultimate structure of a transaction.  It is always best to consult with experienced legal and tax counsel prior to deciding which structure to use. 

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The Firm makes no warranties or representation in consideration to the information provided above. All communication regarding this business must occur directly with The Firm Advisors, LLC. The Firm is not a real estate brokerage and does not sell real estate. The Firm solely advises on exit strategy.