Asset Sales vs. Stock Sales
When a business is being purchased, there are two main ways the transaction can take place. One way is an asset sale in which the buyer purchases the assets held by the seller company. The other way is a stock sale in which the buyer purchases the stock (or membership units in the case of an LLC) of the seller. The consequences of these different mechanics can be very different, so in this article we will discuss the differences between them.
Advantages and Disadvantages of Asset Sales
Buyers prefer asset sales because asset sales allow the buyer to purchase only the profitable assets of the seller without having to also purchase unprofitable assets or liabilities. This means less downside risk for the buyer and potentially lower due diligence costs. Asset sales also allow buyers to step up the tax basis of the acquired assets to obtain deductions for amortization and depreciation. Asset sales often make it easier to avoid a minority shareholder holdout problem.
Some potential downsides to buyers of asset sales are that contracts with suppliers and customers may require renegotiation and the purchase price may be relatively higher since the seller will incur more taxes in an asset sale.
Sellers often do not want an asset sale for the same reasons why buyers prefer them. In an asset sale, the seller will often be left with a number of liabilities or uncollectable accounts receivable and will no longer have the more profitable assets subject to the sale in order to pay those liabilities. For a seller, an asset sale can feel like the buyer is taking the crown jewels and leaving the rest.
Advantages and Disadvantages of Stock Sales
In a stock sale, the buyer is taking on all of the liabilities as well as purchasing all of the assets. This allows for a clean break from the business and is much simpler for the seller. By selling the stock, a seller is also likely to be able to benefit from preferential tax treatment on the purchase price.
Besides not being able to cherry-pick desirable assets, a stock purchase is also less advantageous from a tax perspective for a buyer. The basis of assets simply carries over through the transaction so there is no step-up and goodwill is not tax-deductible if paid in the form of a share price premium.
There are advantages to a stock sale for a buyer too. A stock sale will normally trigger smaller tax consequences. A stock sale does not require retitling assets or renegotiating contracts with suppliers or customers. The same is often true for any permits and licenses held by the seller. A stock purchase can also be simpler to execute if there are not too many shareholders in the seller.
Which Will Occur?
As a general rule, buyers prefer asset sales and seller prefer stock sales. The relative leverage of the parties negotiating the transaction will determine which option is selected. If there are multiple potential buyers, then the seller will be able to dictate a stock sale in order to allow for the cleanest exit. If there is only one potential buyer (usually meaning the seller is not on a positive trajectory), then the buyer will have much greater leverage to purchase only the assets that the buyer wants to acquire and to leave everything else.
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