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.
A handful of employees are being considered In a stock sale to purchase the company we work at. The owner is retiring.
Thoughts on this transaction?
We’ve got a post on this topic here.
Hope it’s helpful to you…
If I am buying the stock of an existing corporation for 1.5M and the terms are paying the seller 200K cash now and getting a loan for the difference. My question is, is the loan I’m getting for this stock purchase my responsibility or the corporations? In other words, if the bank lends the company this money for me to individually be the 100 percent stockholder, is this debt the responsibility of the corp even though I’m the shareholder? I just don’t know how to account for this on the books and not sure if company can be the one paying back the bank loan without being a dividend to me..thx
Well, firstly — Congratulations on your acquisition!
The bank will likely be lending your business the money and using the assets of the business (Bank Accounts, Accounts Receivable, Inventory, Equipment, F&F, Real Estate, etc.) as collateral. I haven’t come across a bank lending this much money without tying up the individual business owner too. I would expect the bank will require you (and maybe your spouse) to personally guarantee the loan. In fact, they may even put a lien on your home if you have a reasonable amount of home equity.
So, the responsibility will most likely fall first upon the business and ultimately upon you and your spouse if it is not paid in full.
If you are borrowing from another lender who is making the loan to you as an individual, your business will not be held responsible for repayment. Instead, you will be.
The way in which you are acquiring the business is important and especially how the business is being treated for federal tax purposes, if it is a stock sale.
If you don’t have professional advisors to assist you in the acquisition, I highly recommend sourcing some help before your go too far down the acquisition path as the tax consequences can be significant. All the best to you Carmen…
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Robert – Thank you for sharing your article addressing the UK perspective on transactions. It was particularly interesting to note that, in a UK asset sale, the selling company’s employees automatically transfer to the buyer on the existing employment terms. In a US asset sale, the buyer may choose the employees it wishes to hire from the selling company, and the buyer may change the existing employment terms.
Useful article. One thing that struck me was that stock transfers are less complex from a legal perspective than an asset sale in the USA. Here in the UK the legals are far more complex (and expensive) for a stock sale than an assets sale. Mainly because the buyers want lengthy warranties against any past bad acts of previous owners. Wrote a similar article in our own blog on the same issues from a UK perspective (link below). Interesting to see the differences. http://www.sellingprivatecompanies.co.uk/selling-a-company-asset-sale-or-share-sale/