What is the difference between an asset sale & stock sale when buying a company?

By | July 17, 2017

What is an asset sale for a transition in business ownership?

Main Street Businesses are most often structured as asset sales. This means the buyer and seller identify assets tangible and non-tangible that are included in the ownership transition. Sometimes there will be liabilities assumed by the new owner, but these are usually limited to accounts that are required to operate the business. The seller keeps the legal structure of the company and therefore the liabilities which most sellers pay off from the proceeds of the business sale.
The advantage of structuring the transaction this way is that the buyer is not purchasing any unknown liabilities or unwanted assets. It’s basically one business entity (usually newly formed by the buyer) purchasing specific assets from another business entity. No surprises.

How is a stock transaction different?

In an ownership transition by way of a stock sale, the buyer is purchasing the actual shares of stock from the shareholders of the business they are buying. The buyer is purchasing the equity of the company which means they are assuming all the assets and liabilities, including any unknown liabilities such as future warranty claims, tax liabilities and/or potential litigation.

What are the benefits and disadvantages?

This is the time for the buyer to have their financial position reviewed for current and future potential tax liabilities in addition to the business tax returns. If the purchase price structured as asset sale exceeds the cumulative tax basis of the assets purchased, by changing the structure to a stock purchase the buyer can increase the cost basis of the assets equal to the purchase price.
This allows for additional future depreciation (on fixed assets such as equipment) or future amortization (on intangible assets such as goodwill) and, as such, helps reduce future taxable income and corresponding income tax expense.

However in an asset sale, the seller will likely have an equal tax disadvantage due to gains on certain assets being treated as ordinary income and taxed at higher rates than assets that receive capital gains treatment. In general, the tax benefit to the buyer is equal to the tax disadvantage to the seller.
In a stock transaction, the seller has a distinct tax advantage as the equity interest sold receives capital gains treatment. Capital gains tax rates can, at times, be 20 percent lower than ordinary income tax rates.

In certain qualifying situations, the buyer can elect to treat a stock purchase as an asset purchase under Internal Revenue Code Section 338 and receive a stepped-up basis for the assets, resulting in future tax deductions as previously mentioned.

A side benefit of a stock transaction to the buyer is the ease in the transfer of non-assignable contracts, permits, licenses, etc. because they are inherently acquired in the transaction.

It is important when structuring the purchase and determining the price to pay and the net proceeds to the seller that all factors be considered by an experienced business broker and an accountant specializing in business ownership transitions. The price being paid for an asset sale and the price being paid for a stock sale are seldom equal even if the dollars paid are.

Richard Roberts, ABI is the Senior Managing Broker at AEGIS Business Brokers, LLC and holds an Accredited Business Intermediary classification by the American Business Brokers Association and is a member of the International Business Brokers Association, International Franchise Professionals Group, Chambers of Commerce, Committees and Volunteer Organizations. Contact Richard at 479.689.4455 or richard@aegis-email.com.

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