When selling your business, one of the first issues that is likely to come up is whether to structure the sale as an asset sale or a stock sale. These are the two primary structures for selling a business, and the differences can have significant consequences for you as a seller.
Liability
In an asset sale, the buyer is purchasing all (or most) of the individual assets of the business from your company. These assets may include equipment, inventory, real estate, intellectual property (including the brand, social media accounts, etc.), and general intangibles such as accounts receivable and goodwill. The buyer has the option to continue the business under the same name or rebrand it with a different name.
In an asset sale, since the buyer does not acquire ownership of your legal entity, the seller technically retains most liabilities associated with the business that predate the asset sale (such as debts, accounts payable, and latent third-party claims). In most asset sales, the legal purchase agreement will typically include provisions whereby the buyer assumes some of those liabilities, but otherwise the seller remains at least primarily liable for more pre-closing liabilities.
Tax
In a stock sale, such as when you sell all of the stock in your company to a buyer, the seller generally pays tax on realized capital gains based on the seller’s tax basis in the stock. However, in an asset sale, the seller will pay tax on the gains with respect to the various assets sold and, depending on the type of assets, some of those gains will be taxed as capital gains and others as regular income. Therefore, as a seller, an asset sale can (in certain circumstances) result in less favorable tax treatment of the gains realized in the sale.
By contrast, there can be advantages to a buyer in treating the transaction as an asset sale rather than a stock sale. When a buyer buys the equity or stock of a business, that buyer generally inherits the tax basis that the purchased company has in its depreciable assets, whereas in an asset sale the buyer is able to “step-up” the basis in the assets purchased to the price paid for the assets in the transaction. This step-up in basis often results in meaningful economic advantage to the buyer because the buyer is often left with more value in depreciating the assets over the following years.
Understanding the tax implications of selling your business as either an asset sale or a stock sale, as well as the potential benefits to be realized by the buyer, is an important exercise when considering a sale of the business. If done properly, the potential to optimize tax treatment to both buyer and seller can often result in more value to both parties. This is an example of where an experienced investment banking team can add real value to a transaction and provide you with invaluable insight into the transaction and your business.
Practical Concerns
While the liability and tax concerns often drive the decision on whether a transaction is done as an asset sale or a stock sale, there are other practical concerns that can sometimes have a meaningful impact. In a business with a large number of licenses, contracts, or titled assets (vehicles), for example, the logistical burden of transferring, assigning, and retitling those assets and licenses can be significant, and sometimes overwhelming. Often these logistical and practical burdens can be substantially simplified by selling the stock of the business such that the buyer simply inherits the assets as part of the stock sale. Even some stock sales will require the seller to obtain consent of third parties and landlords to transferring a controlling interest in the business, but often the burden is materially lighter in a stock sale.
To complicate things further, there is often an opportunity to structure a transaction as a stock sale (benefitting from the logistical simplicity of that structure) and yet make an election to treat the transaction as an asset sale for tax purposes only (benefitting the buyer, and perhaps the seller, for the tax treatment of an asset sale).
In conclusion, the decision to structure the sale of a business as an asset sale versus a stock sale is complex but has the potential to add meaningful value to the transaction that, if structured and negotiated properly, can often result in greater value to the seller. Consulting with an experienced investment banker who is FINRA licensed and able to advise on both asset sales and stock sales, in connection with tax and legal advisers, can be critical to protecting your interests and maximizing the value of your business.
Disclaimer: Investment Banking services offered through Crewe Capital, LLC, member FINRA/SIPC. Neither Crewe Capital nor its investment bankers provide legal, tax, or accounting advice to clients. Please consult your own legal and/or tax advisors in connection with financial decisions.