Asset Sale vs Stock Sale: Everything You Need to Know
Asset sale vs. stock sale is one of the major decisions a buyer needs to make when they purchase a company.3 min read
Asset sale vs. stock sale is one of the major decisions a buyer needs to make when they purchase a company. Will they be purchasing all of the assets outright, or purchasing all of the stock shares issued by the company?
Asset Purchase Benefits
Purchasing a company's assets offers tax advantages for the buyer. If the business has equipment that the owner has fully depreciated for their own tax purposes, the new purchase allows the buyer to step up the value of the equipment and begin the process of depreciation anew. With a stock sale, this is not possible because the equipment has already been fully depreciated.
The amount that a buyer pays for a business over and above the value of its tangible assets is “goodwill.” When an asset sale takes place, the buyer can spread the cost over 15 years, which reduces their tax liability. In a stock sale, the goodwill amount isn't tax deductible until the buyer sells the stock to someone else.
In an asset purchase, the buyer has control over the liabilities that come along with the company's purchase, and as part of the purchase agreement, they can refuse to assume liability for undisclosed or unknown debts. Buyers also have control over the assets included in the sale. For example, since accounts receivable is an asset, the buyer can decline to include it in the sale price if they feel it is of no value due to unsuccessful collection attempts.
Anyone purchasing a business needs to conduct due diligence to make sure they fully understand the value of what they are buying. However, in an asset sale, the buyer has less risk due to unknown liabilities and asset value. Therefore, they need to do less research ahead of time and can feel more confident in their purchase.
In a company sale, it's possible for some shareholders to oppose it. In an asset sale, they have no choice and must sell, depending on the terms of the agreement. The new owner can also decide which employees to retain and which to terminate, taking advantage of the fact that terminating employees does not affect their unemployment rate.
Asset Purchase Disadvantages
There are some situations some situations in which a stock sale makes more sense than an asset purchase. Some of the disadvantages of an asset purchase include:
- The buyer may need to renegotiate contracts with customers and vendors.
- The seller typically pays a higher amount of taxes on the sale, so they may demand a higher price for the purchase.
- Asset purchases can limit assignable contract rights.
- Certain assets, such as vehicles, may need titles transferred between the seller and the buyer.
- Some states require the business seller to get a permit for bulk sales before the completing the asset purchase.
- The buyer may need to rewrite employment agreements and contracts.
- The seller may still need to sell any assets that the buyer has declined to purchase and pay off any liabilities the buyer does not assume.
- The transfer of certain assets, such as intellectual property, may require a filing with the state or federal government, or associated agency.
- Buyers may not legally be allowed to avoid certain business liabilities.
What Is a Stock Sale?
In a stock sale, a company's shareholder sells their existing stock to a new owner. In this transaction, the buyer obtains all company equity including all assets and liabilities. This means the buyer is at risk from future litigation from liabilities that are not paid and cleared.
Not all types of business are eligible for a stock sale. A sole proprietorship, partnership, or LLC does not issue stock. When selling these types of businesses, the buyer purchases the entire ownership interest. Only C corporations and S corporations need to make the choice about selling assets vs. stock.
The decision about whether an asset purchase or stock sale is best for your individual situation is complex and often difficult. It's best to consult with an attorney or adviser who has experience with business mergers and acquisitions, as they can assist both buyer and seller through the entire process and make sure they understand every detail.
If you need help with choosing asset sale vs. stock sale, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.