Choosing an asset sale or a stock sale is a major consideration for a buyer and potential seller of a company. In short, a buyer can choose to purchase all the assets from a company outright or they can choose to purchase stock shares. However, what are the pros and cons of each? This article will you give you an overview of everything you need to know.
ASSET SALE
An asset sale is when a company sells assets, such as equipment, customer lists, goodwill, and licenses. In this type of sale, there is no change in ownership. Instead, the legal owner remains the legal owner of the entity. Additionally, generally buyers typically do not take on the risk of debt and obligations. A buyer has control over what obligations or liabilities they choose to purchase so it’s important to have a full understanding of liabilities if a buyer should choose to include any in an asset purchase.
STOCK SALE
A stock sale occurs when a company’s owner sells his or her existing stock to a new owner. Unlike an asset sale, this purchase would include all assets and liabilities. This can be risky as the new owner is at risk for any future litigation that may occur as result of those same purchased liabilities.
What can this make type of transaction so attractive is it’s less complex than an asset sale. The buyer purchases the stocks and essentially takes the company as-is.
WHO BENEFITS THE MOST FROM EACH SALE?
For each type of sale, there are pros and cons for both the buyer and the seller.
Pros and Cons of an asset sale:
- The tax advantage a buyer obtains by being able to “step up” depreciable assets;
- A buyer can allocate lower values on goodwill;
- The buyer can determine whether her or she will choose to assume any liabilities;
- Customer contracts may need to be renegotiated;
- Due to taxes, the seller may want a higher purchase price;
- Employment agreements may have to be renegotiated.
Pros and Cons of a stock sale:
- Buyers cannot “step up” depreciable assets;
- Buyers accept more risks because any information not disclosed may be a potential liability;
- Under a stock sale, the proceeds are taxed at a lower capital gains rate. Generally, rates can vary depending on an asset and the amount of time it is held;
- Sellers are unlikely to be liable for future liabilities associated with the company.
This article is not intended to provide legal and/or tax advice. Every business transaction is unique, and buyers and sellers should always consult with the appropriate professionals (attorneys and accountants) when considering a business sale structure.