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Asset Sale vs Stock Sale



Typically, buyers prefer asset sales, whereas sellers prefer stock sales. Buyers like the enhanced tax benefits of asset sales and the less exposure to corporate liabilities, and sellers like stock sales due to less income taxes.

An asset sale is the purchase of an aggregation of individual assets. A stock sale is the purchase of the shares of a corporation. In an asset sale, the seller retains possession of the legal entity and the buyer purchases the individual assets of the company, such as equipment, fixtures, contracts, licenses, goodwill, and inventory. Working capital is also typically included in a sale. Net working capital includes accounts receivable, inventory, prepaid expenses, account payable, and accrued expenses.

Asset sales allow buyers to “stepup” the tax basis in its assets. By allocating a higher value for assets that depreciate quickly (like equipment) and by allocating lower values on assets that amortize slowly (like goodwill, which has a 15 year life), the buyer can gain additional tax benefits. However, the transfer of assets may present problems. Some assets may be more difficult to transfer than others due to issues of assignability and third-party consent. Assets that are difficult to transfer may include certain intellectual property, contracts, leases, and permits. Obtaining consents and refiling permit applications can delay the transaction process.

Asset sales generate higher income taxes because while some long held intangible assets, such as goodwill, are taxed at capital gains rates, other assets can be subject to higher ordinary income tax rates. If the assets sold are held in a “C” corporation, the seller is exposed to double taxation. The corporation is first taxed upon selling the assets to the buyer. The corporation’s shareholders are taxed again (as a dividend) when the sales proceeds (after payment of corporate taxes) are distributed by the corporation to the shareholder. If the company that sells the assets is an “S” corporation that was a “C” corporation within the last 10 years, the “S” corporation’s asset sale could trigger corporate-level taxes.

In a stock sale, the buyer purchases the selling shareholders’ stock directly thereby obtaining ownership in the seller’s legal entity. Assets not desired by the buyer will be distributed to the shareholders or sold prior to the sale. Unlike an asset sale, stock sales do not require numerous separate conveyances of each individual asset because the title of each asset lies within the legal entity.

In stock sales, buyers lose the ability to gain a stepped up basis in the assets and thus, cannot re-depreciate certain assets. The tax basis of the assets at the time of sale is the same for the new owner. Buyers accept more risk by purchasing the company’s stock, including all contingent risk that may be unknown or undisclosed. Future lawsuits, environmental concerns, OSHA violations, employee issues, and other liabilities become the responsibility of the new owner. These potential liabilities can be mitigated in the stock purchase agreement through representations and warranties and indemnifications. If the business in question has a large number of copyrights or patents or if it has significant government or corporate contracts that are difficult to assign, a stock sale may be the better option because the corporation, not the owner, retains ownership. Also, if a company is dependent on a small number of large customers, a stock sale may reduce the risk of losing these contracts.

Sellers often favor stock sales because all the proceeds are taxed at a lower capital gains rate, and in C-corporations the corporate level taxes are bypassed. Likewise, sellers are sometimes less responsible for future liabilities, such as product liability claims, contract claims, employee lawsuits, pensions, and benefit plans. However, the purchase agreement in a transaction can be negotiated to shift responsibilities back to a seller.