Asset Sale vs. Stock Sale
When buying or selling a business or a company, two transactions are often involved: an asset sale or a stock sale. These acquisitions usually have different purposes. For example, an asset sale occurs when a business sells all or a portion of its assets, while in a stock sale, the buyer purchases shares of a target company.
In this article, we will explore the differences between these two types of sales and how you can incorporate each into your investing strategy.
What Are Asset Sales?
An asset sale is the purchase of individual assets and liabilities of a target company. In an asset sale, the seller retains legal ownership of the entity but no longer owns the assets sold. Assets can include equipment, goodwill, inventory, fixtures, leaseholds, licenses, patents and trademarks. Net working capital is usually included in this type of sale. This can consist of accounts payable, accounts receivables, inventory, prepaid expenses, and accrued expenses.
Generally, asset sales do not include cash. The seller usually maintains long-term debt obligations, known as a cash-free or debt-free transactions.
Asset Sales From a Buyer’s Viewpoint
“For a buyer, an asset sale is usually (but not always) better, as it will tend to cut off any undiscovered or outstanding liabilities that may exist. It will also tend to protect the buyer from any undiscovered oddities in the capital structure,” business attorney Ryan Reiffert told Investor Junkie. Asset sales also give buyers a tax advantage since they can step up the basis of several assets for depreciation and amortization.
However, asset sales also pose challenges to buyers; assets like intellectual property, leases and permits can be difficult to transfer. Issues such as legal ownership and third-party consents can also delay the transaction process.
Asset Sales From a Seller’s Viewpoint
For sellers, asset sales result in higher taxes, which vary by state. That's because tangible assets are taxed at ordinary income tax rates. Intangible assets are often taxed at lower capital gains rates. Plus, if the entity is sold as a C-corporation or S-corporation that was initially a C-corporation, the asset sale could trigger even higher taxes.
pros of asset sales
cons of asset sales
What Are Stock Sales?
In a stock sale, the buyer purchases shares of stock from the target company’s shareholders, assuming all assets and liabilities. Unlike an asset sale, stock sales are an easier, less complex transaction since the buyer purchases the entire company.
It’s important to note that stock sales are not available in all transactions. If the business is a sole proprietorship, partnership or limited liability company, the transaction can’t be structured as a stock sale since these entities do not have stock.
However, these sales are limited to incorporated businesses, such as C-corporation and sub-S- corporations, where the buyer and the seller determine whether to structure the deal as an asset sale or stock sale.
Stock Sales From a Buyer’s Viewpoint
In a stock sale, buyers neither receive step-up tax benefits nor the convenience of handpicking assets and liabilities. When the stock is sold, buyers lose their ability to re-depreciate the asset. Additionally, buyers may take all the liabilities that come with the company’s stock, whether unknown or undisclosed.
Stock Sales From a Seller’s Viewpoint
Sellers often prefer stock sales because all the revenue is taxed at a lower capital gains tax rate. In some cases, corporate tax is bypassed. Sellers are sometimes less liable to future liabilities like employee lawsuits, contract claims and product liability claims.
pros of stock sales
cons of stock sales
The Bottom Line: How Do They Compare?
An asset sale is the purchase of individual assets and liabilities of a target company, while a stock sale is the acquisition of a company's equity including all the risks. Stock sales are always in favor of sellers, while asset sales are in favor of buyers.
Deciding whether to structure a deal as an asset sale vs a stock sale can be a complex process, especially when it comes to taxes. There are vast variations and complications involved in each type of sale. Different types of entity structures can pose different challenges. As such, you may want to talk to a professional tax advisor or legal advisor before proceeding.
