Stock vs Asset Sale
Do you know the difference between a stock or assets sale and which is better for your business?
In a stock sale, the seller gives the buyer shares of the company. Once the buyer holds all the target shares, it controls the business by virtue of being its new majority owner. Think of this as buying a publicly-traded stock.
In an asset sale, the seller gives the buyer assets. Once the buyer holds all the assets, it controls the business by virtue of having everything that made the seller's equity worth something in the first place. Usually this means transferring the assets to a new entity that the buyer sets up.
In the M&A market, the majority of transactions under $10mm in total purchase price are done as asset purchases versus stock purchases. In an asset sale, the buyer is able to specify the liabilities it is willing to assume, while leaving other liabilities behind. Being able to transfer assets to a new entity removes all historical liabilities and risk such as tax, debt or legal burdens that may have come about through a stock sale.
You will also have more control over the depreciation expense if you have purchased any assets with the business. When purchasing assets rather than stock, the buyer removes the problems presented by minority shareholders who are unwilling to sell their shares to a new owner. A final advantage of an asset sale is purchasing a business is less stringent due to securities law because the parties are not normally required to comply with state and federal securities laws and regulations.
In a stock transaction, the company is being purchased as is including assets and liabilities. Most contracts from the selling entity such as leases, contracts, and permits transfer automatically to the new owner. The acquirer doesn’t have to bother with costly re-valuations and re-titles of individual assets. Also, Buyers can typically assume non-assignable licenses and permits without having to obtain specific consent. Stock sales are not available in all types of transactions such as If the business is a sole proprietorship, partnership or limited liability company, it does not have stock. C-corporations and sub-S corporations must determine whether to make the sale an asset sale or stock sale.
How to determine whether a stock or asset transaction is right?
There are clearly advantages and disadvantages to a stock or asset transaction but ultimately it will come down the buyers and/or sellers preferences. Based on historical information listing your business as a stock or asset sale does not have any meaningful impact on price or valuation.
Most buyers will prefer to do an asset sale since it removes a large amount of historical risk including debt or potential tax liabilities. This strategy provides a buyer with a clean slate, even though he or she is buying an operating business under a new entity which removes legal risk from previous clients or customers.
Most sellers will prefer a stock sale since it is overall a much more simple transaction and removes all potential liabilities their your plate. In an asset sale, the selling entity could still be held liable for taxes or legal issues that arise post close.