If you’re the owner of a company considering a merger or acquisition, you will need to think about the pros and cons of an asset sale vs a stock sale. Generally, a stock sale is advantageous for the seller, whereas an asset sale is advantageous for the buyer. Read the pros and cons below to see whether an asset sale vs stock sale could be right for your company.
Asset Sale vs Stock Sale: What’s the Difference?
Legally, there are two ways to sell a business whose ownership is represented by stocks:
- Sell the stocks to the new owner, paying out each of the shareholders and canceling their stocks.
- Sell all of the company’s physical, digital, and intellectual assets to the new owner, distributing the dividends to the shareholders and rendering the stocks essentially worthless, from which point the company can be liquidated.
In both of these scenarios, the buyer (“Acquirer”) ends up owning the company and the stocks of the former company cease to exist. However, the tax and accounting implications for the buyer and the seller (“Target”) can affect whether an asset sale or stock sale is the preferable method for sealing the deal.
Asset Sale vs Stock Sale: Factors Affecting the Buyer and Seller
In most cases, a stock sale will benefit the seller more. There are several reasons for this:
- The seller avoids having to pay capital gains tax on the increase in value on the business.
- The buyer takes responsibility for the company’s liabilities and assets.
- The seller doesn’t have to worry about the documentation associated with asset valuation and asset transfers.
Conversely, the pros and cons of an asset sale vs stock sale tilt the opposite way for the buyer, who will generally prefer an asset sale. For the buyer, an asset sale offers the following advantages:
- The buyer can choose which assets and liabilities they wish to purchase.
- The buyer enjoys tax advantages — including a stepped-up tax basis and a 15-year amortization of the “goodwill” amount paid, for tax purposes.
Settling on a Mutual Agreement
While the party favored by the purchase agreement isn’t always this way around, the asset sale vs stock sale decision will invariably have more advantages for either the buyer or the seller, depending on the nature of the company and its distinct set of assets and liabilities.
To resolve this problem, the party whose purchase method is chosen will often give the disadvantaged party a compromise on the selling price. This would be a higher price if the seller is disadvantaged or a lower price if the buyer is disadvantaged.
Pros and Cons of A Stock Sale vs Asset Sale
Let’s take a look now at situations in which a stock sale vs asset sale could be preferable:
Your Company Has a Small Number of Shareholders
If your company has only a few shareholders and all of them are happy with the sale of the company, a stock sale could be the most straightforward approach for both the seller and the buyer. However, if your company has many shareholders, including some minority shareholders, a refusal of certain shareholders to sell could hold up the sale of the company.
The Liabilities of Your Company Are Well-Defined
The second case which could be favorable for a stock sale is if the liabilities of your company are well-defined. As a stock sale includes both assets and liabilities, the buyer will want to know exactly what the situation is and what the long-term liabilities will be.
Your Company’s Assets Are Exempt from Depreciation
A third situation in which a stock sale could be the most straightforward is if your assets are mostly digital or intellectual. In a stock sale, the assets are transferred to the new owner at carrying price or “book price,” which refers to the original price you paid for the asset minus its depreciation as a value of cost divided by lifespan in years. As digital and intellectual property doesn’t depreciate over time, the transfer of these assets in a stock sale is more approachable for the buyer.
Asset Sale vs Stock Sale: Seller’s Perspective
In the following situations, an asset sale could make more sense from the seller’s perspective:
Your Company Has Multiple Shareholders
In an asset sale, the shareholders aren’t required to agree to sell their shares, making this the preferable option if minority shareholders are unwilling to sell.
Your Company Has Several Liabilities and Unresolved Accounts
From the buyer’s point of view, unknown or uncertain liabilities are a dissuading factor when deciding to merge or acquire your company. An asset sale gives the buyer the option to purchase only the liabilities that they accept — making each party’s position clear and preventing problems and ill feelings in the future.
The Sale Includes Assets with a Significant Appreciation in Value
As mentioned earlier, property transferred is treated quite differently in an asset sale vs stock sale. In cases where the selling company owns real estate, state-of-the-art facilities, expensive equipment, and high-value vehicles, it makes more sense for the buyer to choose an asset purchase. This way they retain the market value of the assets and pay tax on these items on a stepped-up basis. Any increase in taxes for you in the sale can be offset by agreeing on a higher purchase price with the buyer.
Maximize Your M&As with a Fiduciary Wealth Management Advisor
At the end of the day, the best way to assess the pros and cons of an asset sale vs stock sale is to discuss your specific situation with an experienced fiduciary wealth management advisor. ML&R Wealth Management LLC has over 20 years of experience serving the businesses of Austin, Texas, and is more than happy to work with you to weigh the asset sale vs stock sale decision. As a firm that works with the multiple facets of business and finance, we are also able to provide advice on setting up a 401(k) plan for employees and business owners.
Contact our team to schedule a consultation and maximize your company’s finances today!