There are many pros and cons when it comes to structuring a business sale as an asset sale or a stock sale. It is also complicated because the decision can affect the people involved and some can benefit from opposing structures while others do not. It is important to consult your attorney before deciding on a sale structure. Overall, buyers prefer asset sales, whereas sellers prefer stock sales. Below are the primary differences between asset sales and stock sales.
Since every business transaction is different, this article does not intend to provide legal or tax advice. Buyers and sellers should first, consult attorneys and accountants when considering a business sale structure.
The difference between an asset sale and a stock sale is that an asset sale is the purchase of individual assets and liabilities. A stock sale is the purchase of the owner’s shares, with “partnership units, or membership units.” Some primary concerns when negotiating the type of transaction are tax implications, potential liabilities “, and purchase/sale price allocations.”
Asset Sales take place when the seller keeps possessions of the legal entity. The buyer then purchases single assets of the company some including licenses, trade name, phone number, and equipment. Assets sales usually do not incorporate cash. The seller almost always “pays off at closing, or” retains the long-term debt obligations. Cash-free, debt-free transactions are when this is taking place. Also included in the sale is normalized networking and it includes inventory, accounts payable, accounts receivable, accrued expenses, and prepaid expenses. “Some of these items result in additional consideration at closing.”
Stock Sales take place when a buyer purchases the selling shareholders’ stock directly. This allows the buyer to obtain ownership in the seller’s legal entity. When comparing the actual assets and liabilities obtained in a stock sale, they tend to be similar to that of an asset sale. The assets and liabilities that the buyer does not want will be distributed or paid off prior to the sale. Stock sales do not require many separate conveyances of each single asset because the title of each asset is within the corporation, unlike an asset sale.