So, it’s time to sell. But parting with your business isn’t just about tying on a price tag and waiting for the offers to roll in. In fact, there are two distinct ways to go about it – one way is an ‘asset sale’, and the other is relinquishing of the business’s shares, or the ‘stock sale.’. The main difference between an asset sale and a stock sale when selling a business lies in what is being sold. In an asset sale, the buyer purchases specific assets and liabilities of the business, while in a stock sale, the buyer purchases the ownership interest in the business itself. Deciding on which way to go in your sell-side plan hinges on your unique circumstances – and the needs of the buyer.
That’s not all, though. There are a few administrative and fiduciary requirements for each of these options, including the tax implications, the ownership structure of the company and ease of transferring all or parts of the business to a new owner.
In this article, we’ll detail these two strategies and some important items within each that you’ll likely need to address, which ever road you take.
So, as stated, when selling a business, there are two main options: selling the business assets, or selling its shares. The choice between an asset sale and a stock sale depends on various factors, such as the risks associated with your business practices, structure of contracts, whether there are parts of the business you want to retain, and of course tax implications. This article explains the differences between asset sales and stock sales, and their advantages and disadvantages.
The Difference Between an Asset Sale and a Stock Sale
Asset Sale: In an asset sale, the buyer purchases specific assets and liabilities of the business, such as accounts receivable, accounts payable, equipment, inventory, intellectual property, and contracts. The seller retains ownership of any remaining assets and liabilities not included in the sale. This means that the buyer takes on only those assets and liabilities they want, and the seller retains control over any remaining assets and liabilities.
Stock Sale: In a stock sale, the buyer purchases all the shares of the company from the seller, which means they acquire ownership of the entire legal entity and all its assets and liabilities. The buyer assumes control over the business operations, management, and strategy, and takes on all the risks and liabilities of the company. One caveat is that even with a stock sale, the buyer will require the seller to indemnify them against specific legal claims while the seller owned the business. Such claims can include taxes owed, employee practices liability and other specified items.
Asset Sale or Stock Sale – The Advantages and Disadvantages of Each
Business sellers typically prefer a Stock Sale and buyers prefer an Asset Sale, though there are pros and cons to each sale type that will impact both the buyer and seller.
Advantages of an Asset Sale
An asset sale offers several advantages to a seller, such as:
Advantages of an Asset Sale
Asset sales are generally easier to negotiate and understand than stock sales, thus reducing legal fees.
Sellers can retain assets they do not want transferred to the new owner such as: real estate; specific business lines or equipment.
Buyers only acquire the assets they want and the liabilities they specify in the purchase agreement. Plus, they can re-depreciate the assets based on the value assigned to them at the time of the sale.
Disadvantages of an Asset Sale
Depending on the purchase price allocation much of the sale may be taxed at ordinary income tax rates instead of long-term capital gains rates.
Asset sales may require consent from third parties, such as customers, landlords or creditors, before the assets can be transferred.
Buyers need to “re-hire” each employee and may be required to obtain assignments or consents for leases and contracts and will not be able to maintain loans or lines of credit established by the company.
In a stock sale, the buyer purchases the entire company, including all assets and liabilities. This means that the buyer assumes ownership of the company and all of its obligations, including most legal or financial liabilities.
Advantages of a Stock Sale
The biggest advantage for a Seller is that most, if not all, of the purchase price may be taxed at long-term capital gains rates.
Typically, there are fewer hoops for the seller, as they don’t need to obtain approvals or assignments for contracts, leases and other legal obligations.
Employees continue to receive their paycheck from the same company.
Buyers assume ownership of all the company’s assets, which can be beneficial if the company has a good reputation or established relationships with customers, suppliers, and employees.
Disadvantages of a Stock Sale
Stock sales may require more due diligence and legal work than asset sales because the buyer is acquiring the entire company, including any potential liabilities.
The seller relinquishes full control of the business,
Sellers with assets they wish to retain, such as real estate, may cause an unintended taxable event.
Buyers cannot take advantage of depreciation and amortization of the assets beyond what has yet to be written off in prior tax years.
*Destined is not a tax advisory firm, and this information should not be taken as tax advice. Business owners should always seek individual tax counsel when entering into a sell-side process – this will help you make an informed choice that minimizes your tax liability.
In summation, when deciding to sell a business, there are two main options: selling the business assets, or selling stock. An asset sale involves the transfer of specific assets and liabilities, while a stock sale involves the transfer of ownership of the entire legal entity. Each option has its own advantages and disadvantages in terms of control, flexibility, complexity, cost, liability protection, and tax implications. Typically, the buyer will determine whether the acquisition is a Stock or Asset purchase based on a number of factors.
Ultimately, whatever the journey you seek, Destined is your sell-side partner.