Jan 21, 2022
4 Differences Between Asset Sale vs. Stock Sale
Davis Porter is an extensively published business author who, for over a decade now, has deeply specialized in B2B commerce, finance, digital marketing, and business tech. While he was always intrigued by the intricacies of entrepreneurship, it is his Business Management degree that ultimately sparked his burning fascination for examining and resolving incessant challenges in business/finance.
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Looking to sell your business but torn between a stock sale and an asset sale?
With these two being the primary deal structure options for business acquisition, it’s only natural to compare asset sale vs stock sale before listing your business. Each type of sale is structured differently, with varying purchase price allocation, liabilities, tax implications, and benefits for both business buyers and sellers.
As a seasoned business broker that doubles as a marketplace for buying and selling main street businesses, Beacon has handled its fair share of both stock sales and asset sales. We’ve seen the positives as well as the negatives of each deal structure, and we’ll be explaining both of them - in the simplest manner possible - to give you a good idea of what to expect as you sell your business.
But, before we get into the tax deductions, let’s get the basics right. What is an asset sale in the first place? And how exactly does it differ from a stock sale?
What Is An Asset Sale?
An asset sale - otherwise known as an asset deal or asset purchase - is a special type of business sale that only deals with assets and liabilities. Once the purchase agreement is signed, the business transfers its assets to the buyer’s entity - while the seller retains legal ownership of the original corporate entity.
That means you won’t be handing over the entire business. A buyer will only be able to purchase the individual assets of the company - such as real estate, inventory, fixtures, and equipment.
The assets don’t necessarily have to be physical, though. This deal structure additionally allows you to transfer intangible assets.
You can, for instance, sell your company’s customer lists, telephone numbers, trade names, trade secrets, warranties, goodwill, licenses, leases, and the likes. Some asset deals even include the net working capital, along with the corresponding accounts payable and accounts receivable.
Another thing that buyers get to avoid here is liabilities. Items like accounts payable and mortgage payments are often left out of asset purchase agreements, as buyers are often only interested in real assets. In other words, a buyer gets to pick and choose which assets and liabilities to purchase, when structuring a deal as an asset sale.
Make no mistake about it, though. The sale of liabilities is not prohibited in asset deals. If you find a willing buyer, you can go ahead and throw in even the company’s liabilities to the purchase agreement. It’s all a matter of negotiating with your prospective buyer to find a workable compromise.
What Is A Stock Sale?
Stock Sale. Source: Pixabay
A stock sale, on the other hand, deals with business equity. Instead of transferring just the assets and liabilities, a stock deal allows the buyer to directly purchase company ownership in the form of shares. This is how many of the established businesses are passed on to a new owner.
For sellers, a stock purchase means you’ll be handing over the entity along with its assets and liabilities. It’s worth noting that the transfer of such elements depends on the terms in the purchase agreements. Your buyer could, for example, request you to pay off some of the company’s liabilities before closing the deal.
Such types of deals are not open to all types of businesses, though. As it turns out, a stock sale can only be performed on fully incorporated entities like a C Corporation, or sometimes an S Corporation.
On the flip side, if your business happens to be a Limited Liability Company (LLC), a Partnership, or a Sole Proprietorship, you won’t be able to structure the deal as a stock sale. The reason is that none of these entities are registered with transferable shares.
That notwithstanding, however, it is still possible to sell your equity in any of these three types of businesses. You just have to transfer it in the form of membership or partnership interests, instead of a stock sale.
Stock Sale vs Asset Sale - Here Are The 4 Main Differences
Now that we’ve established what an asset sale and a stock sale entails, here’s a breakdown of the four principal differences between them. You can use these pointers to compare and determine what you stand to gain or lose from an asset vs stock sale.
#1. Supported Company Structures
Company Structures. Source: Pixabay
The good thing about an asset sale is that it’s not restricted to specific company entity types. You’re free to proceed with the sale of assets across all the business structures.
While a majority of our sellers happen to own fully incorporated entities, you’re allowed to close an asset deal through a sole proprietorship, Limited Liability Company (LLC), or partnership company.
The same, however, cannot be said of a stock purchase - as it’s exclusive to incorporated entities such as C Corporations (C-Corp) and S Corporations (S-Corp). Only companies that have transferable shares can proceed with a stock purchase agreement.
This leaves out sole proprietorships, partnerships, and Limited Liability Companies (LLCs). Instead of a standard stock deal, business equity here is transferred in the form of membership or partnership interests.
#2. Tax Implications
Tax Implications. Source: Pixabay
While an asset sale outshines a stock sale in company structure support, it loses a fair amount of points when it comes to tax implications. Sellers here are greatly disadvantaged, as an asset purchase generates significantly higher taxes than a stock deal.
Physical assets, for instance, attract ordinary income tax rates, while intangible assets like goodwill are charged a capital gains rate.
But, that's not all. Owners of C Corporations are even worse off, as the IRS tends to subject them to double taxation. After the sale of assets, they pay corporate level taxes, which are then followed up with personal income tax levies on funds that are subsequently distributed to the individual shareholders.
S Corporations, Partnerships, and Limited Liability Companies, on the other hand, are lucky enough to have just a single round of taxation. The IRS only charges their owners at a personal level upon reception of the capital gains.
And while you face a tax disadvantage in an asset sale, your buyer will, in contrast, be enjoying various tax benefits from their asset acquisition. They could, for example, step up the basis of the assets to qualify for a tax deduction on amortization or depreciation.
Stock sales tend to attract taxes too. But, unlike asset deals, they are charged a much lower capital gains rate and in some cases, even qualify for huge tax exemptions.
If you, for instance, manage to hold on to the Qualified Small Business Stock (QSBS) of a C Corporation for at least five years, the IRS allows you to exempt up to 100% of the stock sale gains from your income taxes.
Business Liabilities. Source: Pixabay
When it comes to liabilities, the only beneficiaries in asset purchase agreements are buyers - as they get to acquire just the assets while avoiding all the potential liabilities.
Sellers, on the other hand, are often forced to retain their business liabilities. Assets like buildings and equipment are transferred to buyers, while liabilities like long-term debt obligations remain with you as the owner of the company.
This means that at closing, sellers need to ensure they receive enough proceeds (or have enough liquid assets) to pay off their liabilities, whether that’s accounts payable, a mortgage, or other long-term debt obligations.
If you’d want a different outcome, you might want to opt for a stock sale. This is the only deal structure where you get to transfer full ownership of the business - complete with its assets and liabilities. That means the buyer can end up inheriting unforeseen risks and culpabilities.
Debt obligations are some of the most common liabilities attached to stock sales. By failing to declare their company’s outstanding debts, unscrupulous business sellers trick unsuspecting stock buyers into taking over the repayment responsibilities.
At least due diligence can protect buyers from such debt-laden stocks. But then again, while it might be effective in safeguarding against such liabilities, due diligence is not 100% foolproof. You still won’t be able to foresee all the risks that may potentially develop from the company’s past activities.
A newly acquired business could, for instance, be hit with lawsuits arising from its past activities. Others somehow pick up heavy tax penalties from audits performed on their previous transactions.
And if a business buyer is able to avoid all that, there’s still the possibility of the company losing money due to issues like pending refunds and unprocessed reimbursements.
Legal Complexity. Source: Pixabay
Although asset deals are flexible enough to facilitate both tangible and intangible assets, the purchase process isn’t always that straightforward. You might experience difficulties passing on some of the assets due to legal ownership and assignability restrictions.
Take, for instance, items such as copyrights, permits, leases, contracts, and intellectual property. Since they’re all legally regulated and usually have an assignability clause, you might not have absolute control over their ownership rights.
That means you won’t be able to just pass them on to your buyers. Instead, you’d probably be expected to follow a legal process, which might involve a lot of paperwork and require approval by government bodies, landlords or other third-party decision makers.
The complications may not end there, though. You’ll notice that even the negotiation process can be pretty complicated in asset deals.
In most cases, you might be structuring the deal as an asset sale even though you are selling the business as a going concern. But in the event you are selling off the assets individually, buyers might take ages to scrutinize every single asset in detail and, in most instances, sellers are forced to negotiate separate terms and conditions for each item of interest.
That wouldn’t be the case with stock sales. Selling and transferring company shares is simpler, as you won’t be subjected to such long negotiations, assignability restrictions, or unforeseen legal paperwork. Instead of negotiating each asset sale separately, everything about the company is captured in one comprehensive purchase agreement.
Verdict: Asset Sale vs Stock Sale
After comparing an asset sale vs stock sale in detail, it’s evident that the latter is great for tax purposes, while the former is likely to generate extra buyer demand.
If you’re trying to sell a C Corporation, for instance, a stock deal will give you favorable tax treatment - in the form of reduced tax rates and, in some cases, tax exemptions of up to 100% on the gains.
The selling and business transfer process itself is expected to be much simpler in stock sales- as you won’t be negotiating one asset or liability after the other.
On the flip side, though, stock purchases may not attract as many prospective buyers as asset deals. And when you combine the resultant low demand with the constant risk of unforeseen liabilities, you end up with a stock sale price that is lower compared to the corresponding asset deal gains.
Asset sales are understandably way more popular with buyers because of all the benefits they offer over stock deals. By purchasing assets, they get to avoid liabilities, as well as use of the accompanying asset tax basis for tax exemptions.
This creates an interesting balance of benefits and compromises on the side of asset sellers. You’ll notice that while an asset deal charges higher tax rates, it makes up for that with a wider market base.
In other words, the popularity of asset deals makes it particularly easy for sellers to find qualified buyers. While stock sellers struggle to attract interested parties, an asset offer is set to convert prospects within a comparatively short period of time.
And that’s not all. You also get to sell assets at a much higher price point than you’d fetch through a stock sale.
Another major benefit that an asset sale offers is flexibility in terms of the supported business entities. While it’s possible to perform an asset sale with any type of business entity, stock sales are intrinsically not meant for sole proprietorships, LLCs, and partnerships. They are, instead, reserved for entities with registered shares.
So, with everything considered, an asset sale should be your preferred deal structure if you’re seeking to derive the best possible value. Regardless of the type of entity your business is registered under, you’ll get access to a whole lot of highly qualified buyers at favorable selling rates.
Here’s a word of caution, though. You wouldn’t want to mess it all up with poorly-informed value assumptions.
We’re giving you complimentary access to Beacon’s business valuation system so you can accurately establish the real prices that you should quote for your business. This system will intelligently crunch the numbers and determine the value of your business based on over 150 data points.
And that’s just the first part. Once you’ve set the price, we’ll pre-screen prospects to identify the most appropriate buyer.
Beacon’s team will further guide you through the entire sales process - helping you even with the due diligence stage, the subsequent closing of the business sale deal, and the implementation of your business exit plan.
Get started today with a complimentary business valuation.
Sell your business with Beacon
Explore your options with a complimentary business valuation.
Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
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