Understanding the Difference Between an Asset Sale and Stock Sale

It is complicated to decide whether to structure a business sale as an asset or stock sale, as both structures can benefit the parties involved. Buyers generally prefer asset sales, while sellers prefer stock sales. This article highlights some of the primary differences between the two.

Asset Sale

In an asset sale, the seller maintains ownership of the entity, while the buyer purchases the company’s individual assets such as equipment, licenses, customer lists, inventory, etc. Asset sales generally do not include buying cash, and the seller typically retains long-term debt obligations. Such a sale is defined as free of cash and free of debt. Typically, standard networking capital is included in an asset purchase agreement. Networking capital includes items such as receivable accounts, inventory, and payable accounts.

Advantages and Disadvantages of Asset Sales

  • A major tax advantage is that the purchaser can “step” the basis of many assets above their current tax values and get ordinary tax deductions for depreciation and/or amortization.
  • WIth an asset transaction, goodwill, which is the amount paid to a company in excess of the value of its tangible assets, can be amortized for tax purposes over 15 years on a straight-line basis. In a stock deal, the goodwill can not be deducted with the acquirer buying target shares until the buyer later sells the stock.
  • Because exposure to unknown liabilities is limited, the purchaser typically needs to spend less time, money, and resources on due diligence.
  • Contracts–particularly with customers and suppliers–may need to be renegotiated and/or revised by the new owner. Typically the seller’s tax cost is higher, so the seller may insist on a higher purchase price.
  • There may be limited assignable contract rights.

Stock Sale

In concept, buying a stock is simpler than buying an asset. In terms of both assets and liabilities, the acquirer buys the target’s stock and takes the target as it finds it. Most of the target’s contracts take effect and transfer automatically to the new owner, such as leases and permits.  For all these reasons, going with a stock purchase is often more straightforward than going with an asset purchase. The downside is liability. When you buy the stock of a business, you buy that business’ history. Any liability or contingent liability (liability that has not yet surfaced) is now yours. Therefore, the due diligence process is more involved and additional representations and warranties are often required of the seller.

Advantages and Disadvantages of Stock Sales

  • The acquirer does not have to worry about expensive re-evaluations and individual asset retitles.
  • Usually, buyers can assume non-assignable licenses and permits without the need for specific consent.
  • Buyers can also avoid paying taxes on transfers.
  • The main drawback is that an acquirer does not receive either the “step-up” tax benefit or the handpicking assets and liabilities advantage.
  • The only way to get rid of unwanted liabilities is to create separate agreements in which they are purchased back by the target.

Choosing the right acquisition transaction can have significant tax consequences for both the buyer and seller, as well as other business-related consequences. With the help of a competent lawyer to walk you through the advantages and consequences of each type of transaction, you can more easily determine whether an asset or stock purchase best suits your needs and wishes. Please contact the Greenbaum Law Firm, P.A. to schedule a consultation today.

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Greenbaum Law Firm, P.A.

The Greenbaum Law Firm, P.A. is a boutique, client-centric law firm concentrating in the areas of business and corporate law, contracts and agreements, and real estate. Our unique approach to the practice of law consists of positioning our clients at the center of the legal practice and pursuing their objectives in the most efficient and transparent manner.

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