When it comes to buying or selling a business, one crucial decision that needs to be made is whether to structure the transaction as an asset sale or a stock sale. Both offer advantages and implications for the buyer and the seller. Understanding the key differences and considerations is essential for making an informed choice that aligns with the parties’ goals and interests.
What Is an Asset Sale?
An asset sale is a business transaction where the buyer purchases a company’s assets and liabilities. Rather than acquiring the ownership interest in the business entity itself, such as stock or shares, the buyer selects and purchases individual assets and assumes specified liabilities. The legal structure and ownership of the selling company typically remain unchanged.
The buyer has the flexibility to choose which assets they want to acquire, such as the following:
Equipment
Inventory
Intellectual property
Customer contracts
Real estate
The buyer can tailor the purchase to meet their needs and strategic objectives. The seller retains ownership of the business entity itself, including any nontransferred assets and liabilities.
Benefits of Asset Sales
Asset sales are typically more beneficial for buyers, with potential pros including:
Risk Mitigation: Buyers do not assume liabilities and potential lawsuits later on.
Tax advantages: Buyers enjoy a bigger tax break. When they acquire another business’s assets, they’ll typically pay more than the asset’s “carry value” — the value listed in the seller’s balance sheets. The IRS lets buyers “step up” the tax basis of the assets to their fair market value, leading to significant tax savings.
Workforce benefits: Buyers can keep the employees they want without affecting the business’s unemployment insurance rate.
Despite the advantages largely favoring buyers, sellers might appreciate retaining certain assets or intellectual property if all the assets are not included in the sale.
Disadvantages of Asset Sales
There are also possible disadvantages to be aware of:
Complicated negotiations: The potential for renegotiations is higher, and certain assets, such as intellectual property and permits, can be challenging to transfer. Both of these things can lengthen the negotiation process.
Tax implications for sellers: Sellers typically pay higher taxes on these sales because the proceeds from the sale are taxed as income. The seller also faces double taxation if the company is sold as a C corporation. The corporation is taxed upon the sale of its assets, and the owners are taxed when proceeds are transferred outside the business. Receiving a higher purchase price can help offset the tax implications.
Setting up a new business: Buyers must set up a new business for the assets they’re acquiring, unless they add the assets to an existing company.
What Is a Stock Sale?
A stock sale is a business transaction in which the buyer acquires the ownership interest of a company, thereby gaining control of the entire business entity. The buyer purchases the existing shares from the company shareholders, and the legal structure and ownership of the business remain intact.
Stock sales are commonly used in mergers and acquisitions and strategic partnerships or when the buyer intends to acquire the entire business entity and retain its structure, contracts and leases. This type of sale allows the buyer to retain contracts that are in place and take control of the company’s operations.
Benefits of Stock Sales
Sellers often prefer stock sales, though there are benefits for both parties:
Get up and running fast: Because buyers inherit a business’s customers, equipment, name recognition and other assets, it’s easier to get started with fewer interruptions.
Tax advantages for sellers: Rather than being taxed as income, proceeds from the sale are taxed at a lower capital gains rate. There’s also no risk of double taxation.
Simpler transaction structure: Both parties can benefit from simpler negotiations and the automatic transfer of contracts, permits and licenses.
Disadvantages of Stock Sales
Consider the potential downsides of stock sales:
Receive the business as-is: Buyers get the business as-is, including known and unknown liabilities and assets they may not want.
No tax benefits for buyers: While the tax situation benefits sellers, buyers do not receive tax benefits like they would with an asset sale.
Where Does Section 338(h)(10) of the Internal Revenue Code Come Into Play?
Sometimes, acquiring companies can treat stock purchases as asset purchases for tax purposes. This way, the buyer can enjoy the “step-up” tax benefit mentioned above while purchasing the target company’s stock. While this might sound like a win for buyers, it can be an expensive and complicated process, especially if the target company has many assets. Section 338(h)(10) election is only an option in very specific scenarios, so interested buyers should consult a tax professional.
Asset Sales vs. Stock Sales
Though asset sales are typically more favorable for buyers and stock sales are more beneficial to sellers, both parties can benefit from each transaction type. Let’s compare the key differences between asset sales versus stock sales:
Transfer of assets: During an asset sale, the buyer purchases specific assets and liabilities of the business, and the seller keeps ownership of the business entity itself. With a stock sale, the buyer purchases the ownership interest of the company and gains control of the entire business entity.
Tax considerations: In an asset sale, the seller may face taxes on gains from the sale of individual assets. However, the buyer may benefit from potential tax advantages, such as depreciation deductions on the acquired assets. In a stock sale, the seller may face taxes on capital gains realized from the sale of their shares. The buyer may not benefit from certain tax advantages, such as depreciation deductions, as the assets’ tax basis remains unchanged.
Legal and liability: In an asset sale, the buyer generally assumes only the liabilities they explicitly agree to take on, which allows the buyer to mitigate risks and avoid undesirable liabilities. In a stock sale, the buyer assumes all existing and potential liabilities associated with the business. This includes known and unknown liabilities, such as debts, legal claims and contractual obligations. To mitigate these risks in a stock sale, the buyer usually requires a indemnification clause so that sellers will indemnify the buyer of any liabilities that resulted from events that occurred prior to the new buyer taking over the business.
Is an Asset Sale or Stock Sale Better?
Determining whether an asset sale or stock sale is better depends on several factors, including:
The specific circumstances of the transaction.
The buyer’s and seller’s goals and preferences.
Legal, financial and tax considerations.
By weighing the advantages, legal considerations, financial implications and tax consequences, you can navigate these transaction structures with confidence.
Sell Your Business With Help From Synergy Business Brokers
More than seven ranking organizations have placed Synergy Business Brokers in the top 10 business brokers nationwide. We have more than two decades of experience and a network of over 40,000 potential buyers. Sell your business with help from us at Synergy Business Brokers!
