When it comes to a business sale, one of the biggest things to consider is whether or not the business in question should be sold as a stock or an asset. A business owner may think that the choice isn’t too important, as long as the greatest sale prices are achieved. However, some situations in which a lower sale price is an option can be worthwhile.
In this guide, we’ll be defining asset and stock sales as well as their key differences in the context of a business succession.
What Is an Asset Sale?
An asset sale is where a seller will sell the purchaser assets. Once the purchaser is in possession of all assets, they can control the business by having the assets behind the business’s equity worth.
Even though the purchaser does not have the seller’s actual shares of the business, they do have everything that made those business shares have value.
What Is a Stock Sale?
A stock sale is where a seller will sell the purchaser shares of the business. Once the purchaser has all of the target shares in their possession, they then control the business as the business’s official new owner.
Having the majority of stocks in such a situation will make the purchaser the new owner of the business, essentially. The previous owner will no longer derive money from the business through those stocks.
Asset vs. Stock Sale: Tax Rates
For a stock sale, a seller can realize the actual gain on their business at the ideal capital gains tax rates.
An asset sale, on the other hand, will expose the proceeds to the original owner’s income tax rates on particular assets. If the business is sold as an asset sale via a C-corp, those proceeds are vulnerable to double taxation through individual tax and corporate tax rates. The buyer would prefer an asset purchase when it comes to taxes because they will be eligible for a stepped-up basis, meaning they will limit the potential gain in the event the business is sold again down the road.
Asset vs. Stock Sale: Business Liability
When purchasing a business as an asset, the tax benefits as well as the liability benefits can be quite attractive. Asset sales can help protect purchasers from a lawsuit as a result of the previous owner’s actions.
For stock sales, the purchaser will take on most of the business’s established liabilities, regardless of whether or not such liabilities are known. There are exceptions in different cases, but generally, an asset sale will better limit the purchaser’s exposure to liabilities in the business.
Asset vs. Stock Sale: Expenses
In most cases, an asset sale is significantly more expensive and complex to deal with. Different assets and liabilities that are transferred during an asset sale must be clearly stated. The gains and losses are also extensively calculated for each and every asset in the sale as well. Because of the complexity of such sales, there will be fees for things like legal titling, appraisals, and other items.
Stock sales, on the other hand, are fairly quick and simple processes because they are a cut-and-dry transfer of business shares.
There are many elements to consider when deciding if a stock or asset sale should take place. The process should involve some serious thought, rather than intense focus on the highest sale possible.
Feel free to contact our team if you have questions, thoughts, or feedback, or if you want to discuss whether a stock or asset sale would be right for your business.
Photo source: Unsplash