During the initial negotiations of a business sale, one of the primary issues is whether to structure the sale as an asset sale or a stock sale. Typically the seller and the buyer have opposing preferences in this regard. The seller generally prefers a stock sale; while the buyer generally prefers an asset sale.
Asset Sale vs Stock Sale
An asset sale involves the sale of individual assets and liabilities, while a stock sale involves the sale of the owner’s/owners’ shares in the business. This article highlights some of the considerations and preferences in choosing an asset sale versus a stock sale. However, every business transaction is unique. Sellers and buyers should always consult with their professional advisers, such as their attorneys and accountants, prior to deciding upon the structure of the sale.
Considerations and Preferences in Choosing an Asset Sale
- The buyer generally prefers an asset sale.
- The transaction documents are typically more complex.
- The seller often has less favorable tax treatment.
- Contracts, permits and licenses often can be transferred only after obtaining third-party consents.
- Majority, rather than unanimous, shareholder approval is typically needed.
- The buyer is often able to limit its liability to those liabilities that the buyer agrees to assume (however, there are significant exceptions, such as environmental and ERISA).
- The buyer and the seller need to consider the impact of C-corporations versus S-corporations.
- The purchase price needs to be allocated among the assets.
Considerations and Preferences in Choosing a Stock Sale
- The seller usually prefers a stock sale.
- The transaction documents are typically simpler and fewer.
- The seller often receives favorable tax treatment.
- Contracts, permits and licenses often can be transferred without third-party consents.
- All shareholders must be willing, or there must be a mechanism to require all shareholders, to sell their shares in order for the buyer to acquire the entire business.
- The buyer is subject to all of the seller’s liabilities, except to the extent that the seller indemnifies the buyer.
- The buyer typically assumes the seller’s basis for the assets, unless the buyer files an election to step up the basis in the assets.
- The buyer may not be able to use tax loss carry-forwards, subject to limitations.
- The buyer often assumes more risk because of unknown or undisclosed liabilities.
This document is intended to provide information of general interest and is not intended to offer any legal advice about specific situations or problems. Neither the author nor Metz Lewis Brodman Must O’Keefe LLC intend to create an attorney-client relationship by offering this information, and anyone’s review of the information shall not be deemed to create such a relationship. You should consult a lawyer if you have a legal matter requiring attention.