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  • Asset Sale vs. Stock Sale – A Brief Overview

    Sep 4, 2018

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog has been provided by Kelly Deis of Soundpoint Consulting (www.soundpointconsulting.com).

    Asset Sale vs. Stock Sale – A Brief Overview

    So, you want to sell your business. For most of us, it is a once in a lifetime event. There is no reason to expect that you should know the intricacies of a transaction.

     

    That is why it is oh so important to have good advisers help walk you through the process.

     

    One of the fundamental decisions you will need to make is whether the transaction will be an asset or stock sale. It will depend upon your individual circumstances as well as your business structure.

     

    If you are an LLC, then a stock sale is not an option as there is no stock to sell (although owners may sell their membership interests).

     

    S-Corps have the option of the 338 election which treats the transaction as a stock sale for legal purposes and an asset sale for tax purposes, but that is WAY beyond the scope of this newsletter.

     

    Not surprisingly, the buyer and the seller benefit from opposing structures. In general, buyers prefer asset sales and sellers prefer stock sales.

     

    And, all else being equal, assets sales generally command a higher purchase price than stock sales due to the tax advantages to the buyer. Here is a brief overview.

     

    Asset Sales

    Most small business transactions are asset sales. An asset sale is the sale of the business’ assets and liabilities, such as fixed assets, accounts receivable, inventory, licenses, goodwill and payables.

     

    Much like selling a house, the seller generally pays-off any long-term debt with the proceeds from the sale.

     

    In an asset sale, the seller should consider:

    • They can exclude specific assets from the sale if they so desire. Assets that come to mind include the company car and/or real estate.
    • Taxes are generally higher. While goodwill is taxed at the lower capital gains rate, the sale of “hard” assets are subject to ordinary income tax rates.
    • Any contingent liabilities, such as a pending lawsuit or product liability claims stay with the seller.
    • Asset titles and contracts need to be transferred to the new owner.

    And for the buyer:

    • They can refuse any unwanted assets, liabilities or contracts.
    • They can step-up asset values for depreciation purposes.
    • Contingent liabilities can be avoided.

     

    Stock Sales

    In a stock sale, the purchaser buys the shareholders’ stock, thus purchasing the entire legal entity.

     

    Although sellers often prefer stock purchases, these transactions are generally reserved for larger corporations. Only about 30% of privately held companies are stock transactions.

    .

    That said, here is what you should know. For the seller:

    • All proceeds are taxed at the lower capital gains rate.
    • They have less responsibility for future liabilities, although this can be offset by additional holdbacks.
    • The transaction is straightforward; all assets and liabilities transfer to the new entity.

    And for the buyer:

    • Contracts stay intact and assets transfer seamlessly.
    • There is no step-up in the cost basis.
    • They are responsible for contingent liabilities, such as future litigation or product liability claims.

    If you are considering selling your business, be sure to understand the differences in an asset and a stock sale before agreeing to either structure. This is one instance where the proper business, tax and legal advice can be invaluable.

     

    If you have questions relating to deal structure options, Kelly Deis, CVA, CEPA and President of Soundpoint Consulting, a business valuation and consulting firm specializing in business valuations, exit planning, strategy and operations business consulting, and financial services for marital dissolutions, would welcome inquiries. Kelly Deis can be reached at 206.842.4922, or kelly@soundpointbusinessconsulting.com

     

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.

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