Asset purchase vs. stock purchase for small businesses

When buying or selling a business, there is a choice

By Dave Driscoll

Most business sale transactions are either an asset sale or a stock sale. Defining each type of sale helps understand why there are advantages and disadvantages to sellers and buyers in both types.

Asset Sale – A buyer purchases some or all of the assets of the business from the seller’s company. The seller’s business entity remains intact, and only defined assets are transferred in the sale.

Assets are described as:

            Tangible: Furniture, fixtures, equipment, building and improvements, software, and net   working capital (accounts receivable, inventory minus accounts payable)

Intangible: Tech and knowledge-based intangibles, non-compete covenants, proprietary information, secret processes, customer lists, copyrights, patents, specialized business systems, etc.

Stock Sale –A buyer purchases the seller’s ownership interest (their stock) in the business. A buyer purchasing the seller’s stock assumes all the ownership rights of the selling shareholder. The acquisition is a transfer of the ownership of the business entity itself. The entity continues to own the same assets and retains the same liabilities.

In an asset sale, the seller generally keeps the cash in the business, as well as long-term debt obligations. The transaction is called a cash-free and debt-free transfer. Net working capital is typically included in an asset sale agreement.

The major advantages of an asset sale include:

  • The buyer can “step up” the basis of many of the purchased assets over their current tax values and obtain future tax deductions for depreciation/amortization of those assets.
  • The value paid for the company over the stepped-up basis of the tangible assets, called “Goodwill,” can be amortized on a straight-line basis over 15 years.
  • A buyer can select only those assets they want, and not assume any liabilities in the transaction.
  • With limited exposure to unknown liabilities, buyer due diligence can be accomplished with less time and money.
  • Typically, all employees are terminated by the seller and the buyer can select which employees to retain, with no obligation to those who are not hired.

Disadvantages of an asset sale:

  • Tax cost to the seller is typically higher than in a stock sale. Therefore, the seller may require a high price.
  • Assets will need to be re-titled.
  • Employment agreements will need to be renegotiated.

In a stock sale, most contracts the seller has, such as leases, permits, and service agreements, transfer automatically to the new owner. The entire balance sheet transfers to the buyer, except for any items retained by the seller through negotiations with the buyer.

Other advantages to a stock sale include:

  • The seller’s tax obligation on the sale of their stock is taxed at a capital gains rate, which is lower than an asset sale.
  • Contracts, employment agreements, service agreements, permits, and licenses transfer to the buyer, avoiding renegotiation.

Disadvantages of a stock sale:

  • The buyer does not receive the “step up” in basis tax advantage.
  • The buyer may have exposure to potential unknown liabilities.
  • In a stock sale, the buyer cannot deduct goodwill until the stock is later sold by the buyer.

Transferring ownership of a business can be accomplished in various ways, and deal structure is important to meet the needs of the seller and the buyer. Specific circumstances important to the seller and/or buyer will need to be worked through to reach a meeting of the minds and move forward with the deal. Careful consideration should be given to those needs because without both parties addressing those factors, putting together a mutually-beneficial deal could prove difficult.

Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at [email protected] or (314) 303-5600.

As seen in Dave Driscoll's column in St. Louis Small Business Monthly
As seen in Dave Driscoll’s column in St. Louis Small Business Monthly

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