pros and cons of asset sale vs stock sale

In an equity sale all of the assets and liabilities remain with the target company, so if the parties want only some of the target’s assets be transferred to the buyer, then an asset sale will be preferable. No need to spend hours finding a lawyer, post a job and get custom quotes from experienced lawyers instantly. Although deal lawyers generally describe their practice as involving “mergers and acquisitions,” the sale of a small or medium-sized business is usually structured as either an equity sale or an asset sale. Purchasing a company's assets offers tax advantages for the buyer. If the business has equipment that the owner has fully depreciated for their own tax purposes, the new purchase allows the buyer to step up the value of the equipment and begin the process of depreciation anew. When comparing asset sales to share sales, it's important to consider the pros and cons of each option: An asset sale can be used to sell any type of business; a share sale can only be used to sell an incorporated business. Buyers also have control over the assets included in the sale. The selling equity holders are left holding the cash. Limited asset sales might not require the approval of the stockholders of the selling company (though a sale of substantially all assets will still require stockholder approval). In Asset Purchase vs. Stock Purchase, whether to go for an asset purchase transaction or a stock acquisition method depends on the company’s goals and objectives, and it also depends on the target company that one is acquiring. An asset sale is a transaction where the buyer purchases the operating assets of a business. An asset sale allows the buyer to cherry pick which assets it will purchase and which liabilities it will assume. Do the parties want all of the target’s assets and liabilities to be transferred to the business buyer? Difference Between Stock Purchase and Asset Purchase. Often in larger stock sales, there is a requirement for seller financing, loans, stock options, and complicated tax implications. Having an asset sale also means that the process is quicker for the seller and the seller doesn’t have to worry about complicated purchase structures. It all depends on your circumstances, but there’s certainly a lot to think about. An asset purchase involves the purchase of the selling company's assets -- including facilities, vehicles, equipment, and stock or inventory. The business is transferred to the new owners, corporate (or limited liability company) entity and all, and the target (i.e., the business being purchased) becomes a wholly-owned subsidiary of the purchaser. The seller’s pros and cons Share Sale Pros. The sale proceeds are taxed again when they are distributed to the shareholders in the form of a dividend. In an asset sale, they have no choice and must sell, depending on the terms of the agreement. If the target company has important contracts that aren’t assignable without the consent of the target’s counter-party due to anti-assignment clauses contained in the contracts, an equity sale might be preferable. In effect the buyer steps into the shoes of the seller and the corporation continues on with the only change being a new owner. In addition, some states impose taxes on transfers of real property, which can often be avoided if a transaction is structured as an equity sale. Asset sale vs. stock sale is one of the major decisions a buyer needs to make when they purchase a company.3 min read. A contracts aficionado, Brian publishes theContractsGuy blog and frequently gives presentations on mergers and acquisitions, contracts, and other business and legal topics. Would it be correct to say that in a stock sale the buyer not only buys the stock of a company but also owns all real property, furnishings, patents, employee roster and account receivable’s etc. This advantage is off-set to some extent, however, in states like New York that do not have a “casual and isolated sales” exception and thus impose sales taxes on certain types of assets in the business acquisition context. When Microsoft acquired LinkedIn on June 13, 2016, what Microsoft was acquiring with its cash was LinkedIn stock. Established credit. The seller may still need to sell any assets that the buyer has declined to purchase and pay off any liabilities the buyer does not assume. Which structure is right for you depends on your circumstances. Want High Quality, Transparent, and Affordable Legal Services? The assets transferred might be all of the target company’s assets, or they might be more limited in scope. Asset sales can be advantageous for sellers in that they can stipulate the assets they wish to sell and retain ownership of those they do not (i.e. • An asset sale can be used to sell any business, whereas a share sale can only be used to sell an incorporated business. The result will be that the buyer owns 100% of the merged company (the “surviving … Sole Proprietorship, Partnerships and LLCs The purchase price of a business can depend on whether or not the sale is a stock or asset sale. is not … Buyers may not legally be allowed to avoid certain business liabilities. Asset sale pros and cons for sellers. Outcome– A share sale results in a clean break for the seller: the buyer purchases the whole company, including all liabilities (unless expressly agreed otherwise). The new owner can also decide which employees to retain and which to terminate, taking advantage of the fact that terminating employees does not affect their unemployment rate. Assets and liabilities not desired by the buyer will be distributed or paid off prior to the sale. This can include equipment, inventory, lease agreements, licenses and trade secrets. Also, an asset sale will also allow a buyer to leave behind parts of the business they consider too risky and not to take on past tax obligations. With a stock sale, this is not possible because the equipment has already been fully depreciated. Asset sales are common on companies that are experiencing financial distress or have gone completely bankrupt. Any negative history incurred by the previous owners (suppliers, taxes, etc.) So which structure is best for you? You would start the depreciation over that gives us some flexibility or some creativity that we work with. In addition, if the buyer wants to leave some or all of the target’s liabilities with the seller, then an asset sale will be preferable, because the buyer indirectly assumes responsibility for all of the known and unknown liabilities of the target when a transaction is structured as an equity sale. When selling these types of businesses, the buyer purchases the entire ownership interest. An asset sale is advantageous to the buyer as it allows them a step-up in basis in the acquired assets, which accelerates greater depreciation and offers an opportunity to reduce taxable income. The transfer of certain assets, such as intellectual property, may require a filing with the state or federal government, or associated agency. 2.Sale Process– The business continues as a going c… It is therefore a question of fact whether the sale is of t… • If you choose an asset sale you are more in control of what you’re selling and are able to keep certain assets (such as the business name etc.). Your email address will not be published. However, by law, the buyer will become liable for environmental contamination and for union employees in an asset tr… Image may not be copied or downloaded. Was this document helpful? A share sale transaction is simpler for the seller than an asset sale as the company is sold as a ‘going concern’ in totality. Certain assets, such as vehicles, may need titles transferred between the seller and the buyer. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb. If the target company is financially distressed, transfers for less than reasonably equivalent value might pose issues under the federal bankruptcy statute or state fraudulent conveyance laws. Some states require the business seller to get a permit for bulk sales before the completing the asset purchase. However, in an asset sale, the buyer has less risk due to unknown liabilities and asset value. Here are the pros and cons for buyers. In an asset purchase , the buyer has control over the liabilities that come along with the company's purchase, and as part of the purchase agreement, they can refuse to assume liability for undisclosed or unknown debts. Asset Purchase vs Stock Purchase: Asset Advantages. This may well not be the case as employees of the seller business will be subject to TUPE legislation (this is employment legislation) which has the effect of transferring employees’ rights and obligations to a buyer where “the whole or substantially the whole” business is sold. Brian was named by Small Business Monthly in 2014 to its list of 100 St. Louisans to know to succeed in business and was recognized by the newspaper each year from 2015 through 2018 as a top M&A adviser. In addition, the buyer’s tax basis in the assets is equal to the purchase price of the assets. Image via Shutterstock. Pros and Cons: Real Estate . Cooley LLP USA January 26 2017 ... and understanding the pros and cons of your alternatives is important. Buyers like the enhanced tax benefits of asset sales and the less exposure to corporate liabilities, and sellers like stock sales due to less income taxes. A disadvantage to the seller of an asset sale is the double taxation that can result if the target is a C corporation. Most buyers prefer asset deals due to the tax advantages they can secure. Buyer’s Viewpoint … For corporations, sellers always want to sell stock, while buyers always want an asset sale. The buyer may need to renegotiate contracts with customers and vendors. Asset Sale– Advantages No legal liability for the corporation prior to the purchase. In an asset sale the target company’s assets, and sometimes its liabilities, are transferred to the buyer. However, every business transaction is unique. the pros and cons of “Asset purchase/ sale vs. Share purchase/sale.” Pros and cons of assets vs. shares A quick guide to success when buying or selling a pharmacy BUYING A PHARMACY Asset purchase: Share purchase: PROS • This company is yours to begin from scratch! Here are the basic pros and cons of each strategy: Asset Sales. In addition also inheriting any liabilities. This article highlights some of the considerations and preferences in choosing an asset sale versus a stock sale. Anyone purchasing a business needs to conduct due diligence to make sure they fully understand the value of what they are buying. The seller typically pays a higher amount of. However, the buyer will expect extensive warranties and indemnities in the sale contract to mitigate its increased exposure to risk and this can often lead to protracted negotiations. Acquiring another company through an asset sale is different than purchasing all or the majority of a company's stock. It can be a great opportunity to snag a deal on … Summary: A merger means that two companies are literally combined into a single company. A sole proprietorship, partnership, or LLC does not issue stock. The result is that the entire target company, including its assets and liabilities, is now held by the buyer, with the target company remaining intact. Selling Your Company: Merger vs. Stock Sale vs. Asset Sale Blog Cooley Go. The Advantages of an Asset Purchase When deciding between an asset purchase vs. a stock purchase, it’s essential to weigh the pros and cons in terms of price, the complexities of getting the deal done, and the tax implications. Your email address will not be published. Some of the disadvantages of an asset purchase include: In a stock sale, a company's shareholder sells their existing stock to a new owner. Some governmental authorizations, permits, and licenses are not transferable. The decision about whether an asset purchase or stock sale is best for your individual situation is complex and often difficult. The sale of all or substantially all of a corporation’s assets generally requires the approval of the corporation’s board of directors and shareholders. In a stock sale, the goodwill amount isn't tax deductible until the buyer sells the stock to someone else. We know this because the announcement press release, merger agreement and merger proxyall describe how Microsoft is buying Linkedin shares. This means that (subject to any agreed price adjustments or indemnifications) the seller gets to walk away from any liabilities and the buyer takes them on. Typically, buyers prefer asset sales, whereas sellers prefer stock sales. Pros and Cons of Asset and Stock Pharmacy Purchases - Sykes & … For example, since accounts receivable is an asset, the buyer can decline to include it in the sale price if they feel it is of no value due to unsuccessful collection attempts. Cons If only a portion of the company’s assets are being sold, it can be time consuming, expensive and impractical, to separate assets (and contracts relating to such assets) to be acquired from the … Real estate investors have the ability to gain leverage on their capital and take advantage of substantial tax benefits. Hire the top business lawyers and save up to 60% on legal fees. anti-assignment clauses contained in the contracts, Assignment of Noncompetition Agreements in an Asset Purchase, Missouri Business Entity Search — Resource of the Week. If you were stepping into the shoes and being a part of a stock sale, you’ll just continue to depreciate us as the way they were on the books. As discussed above, there are pros and cons to each party in a transaction depending upon whether it is structured as an asset deal or a stock deal. The parties should use caution, however, because some contracts define “assignment” to include a change of control, which would be triggered in the event of an equity sale. All rights reserved. In the case of assets that have been depreciated by the target company, the buyer’s basis in the assets is higher than it would be on the books of the target company. In general, buyers prefer asset sales and sellers prefer equity sales. There are several pros and cons of each choice. In an equity sale, the buyer purchases the equity from the owner or owners of the target company — stock in the case of a corporation and membership interests in the case of a limited liability company. Unlike exchange-based tax-deferment methods, Deferred Sales Trusts are an instance of a special kind of sale, called an “installment sale”, which can be used to defer capital gains taxes by breaking up payments on the sale over multiple installments.Unlike … Not all types of business are eligible for a stock sale. The short answer is that a stock sale is better for you, the seller, while the buyer benefits from an asset sale. Therefore, it is more beneficial for a buyer to structure a transaction as an asset deal when there are fully depreciated fixed assets or intangible assets/goodwill associated with the transaction. ... Pharmacy Stock vs. Asset Purchase: Pros and Cons. State corporation laws need to be considered when a business is sold via an asset sale. Deferred Sales Trusts provide an alternative to 1031 exchanges for deferring capital gains taxes on appreciated assets. Now let’s take a look at some issues that buyers and sellers need to consider when structuring a business acquisition. ... in an asset sale, everything they purchase will have a valuation as of the date of the acquisition. Brian Rogers is the founder of Blue Maven Law, LLC, a law firm that focuses on small business mergers and acquisitions as well as advising small businesses on legal issues. There is no change in the status of the target entity itself, and its contracts, assets, and liabilities remain with the entity. What Is Allocation of Purchase Price in Asset Sale? A stock purchase involves the purchase of the selling company's stock only. Similarly, some or all of the target’s liabilities might be transferred to the purchaser or retained by the target company, although most of the liabilities often stay with the target. There are some situations some situations in which a stock sale makes more sense than an asset purchase. Per the proxy, at deal closing, each LinkedIn shareholder was set … Buyers also receive a “restart” of depreciation and amortization … Whether agreeing to an asset purchase or stock purchase in the sale of a pharmacy, the buyer must perform due diligence. Only C corporations and S corporations need to make the choice about selling assets vs. stock. In contrast, in an equity sale, the seller generally pays the applicable short-term or long-term capital gains rate on the sale of his or her stock, and there is only one level of taxation. It's best to consult with an attorney or adviser who has experience with business mergers and acquisitions, as they can assist both buyer and seller through the entire process and make sure they understand every detail. Share it with your network! The sale of assets is generally a taxable event that results in the assessment of tax at the corporation level. In a share sale, however, the entire business, including the name is passed on to the new owners. If you need help with choosing asset sale vs. stock sale, you can post your legal need on UpCounsel's marketplace. Because the target’s contracts remain intact in an equity sale, they generally are not assigned and thus consent isn’t required. In contrast, a stock sale does not require the approval of the target company’s board of directors, although in most cases it requires the consent of all the shareholders. It also helps the buyer avoid assuming any unwanted or unknown liabilities, which can occur in a stock sale where any “past skeletons” of the seller become the buyer’s problem. The amount that a buyer pays for a business over and above the value of its tangible assets is “goodwill.” When an asset sale takes place, the buyer can spread the cost over 15 years, which reduces their tax liability. Note that, while the buyer’s legal transaction is with the target’s equity holders in an equity sale, the transaction is with the target itself in an asset sale. Here are several advantages of an asset purchase transaction: A major tax advantage is that the buyer can “step up” the basis of many assets over their current tax values and obtain tax deductions for depreciation and/or amortization. they may wish to retain certain assets such as their cars or items of equipment). Asset Sale. With a share sale, all of the assets and liabilities of the target company remain with that company. Required fields are marked *. Structuring a transaction as an equity sale won’t solve the problem in all cases, but it often does. Therefore, they need to do less research ahead of time and can feel more confident in their purchase. Unlike an asset sale, stock sales do not require numerous separate conveyances of each individual asset because the title of each asset lies within the corporation. This means the buyer is at risk from future litigation from liabilities that are not paid and cleared. This note provides an overview of the key differences between a share purchase and an asset purchase transaction, and sets out some of the main advantages and disadvantages of structuring a corporate transaction as a share sale or 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. ASSET SALE VS STOCK SALE. In an asset sale, specified assets are transferred from the target company to the purchaser, while the corporate or limited liability company entity remains in place and continues to be owned by its owners. What Is Purchase and Sale Agreement Definition? Asset purchases can limit assignable contract rights. In a company sale, it's possible for some shareholders to oppose it. The benefits of an asset sales are not just for the buyer. The buyer may need to rewrite employment agreements and contracts. An advantage to the buyer of an asset sale is that the buyer can allocate the purchase price for tax purposes among the various purchased assets to reflect their fair market value. In an asset sale, the seller retains ownership of the original legal entity and the buyer purchases the individual assets of the seller one by one. An asset sale is the purchase of an aggregation of individual assets. Both approaches conceptually get you to the same place, but certain legal, tax and accounting issues make this decision important. The sale of assets is generally a taxable event that results in the assessment of tax at the corporation level. In a regular Section 338 election, two levels of tax are imposed: one on the shareholders upon their sale of the target stock and the other on the deemed asset sale by the target corporation (“Old Target”).In a Section 338(h)(10) election, typically only one level of tax is imposed, on the deem… At Beacon Advisors, we help you weigh your options Below we have outlined the major differences between the two as well as some of the pros and cons of each. Because the liabilities (known and unknown) will … This post discusses some of the pros and cons of each deal structure. In an asset purchase, the buyer has control over the liabilities that come along with the company's purchase, and as part of the purchase agreement, they can refuse to assume liability for undisclosed or unknown debts. In a stock sale, the goodwill amount isn't tax deductible until the buyer sells the stock to someone else. A disadvantage to the seller of an asset sale is the double taxation that can result if the target is a C corporation. If the company has more liabilities than any good valuable assets, then it is better to go for a stock acquisition rather than going for an asset … © 2014 Blue Maven Law, LLC. A Section 338(h)(10) election is much more common than a Section 338(g) election because the 338(g) election results in two levels of tax, whereas a 338(h)(10) election results in only one. In this case, you are not purchasing stock. ... Stock Sale – Advantages. ... As with an asset purchase, the stock purchase agreement will need to include an indemnification section and a noncompete. So in an asset sale, you’d be buying that equipment as new equipment. 1. Liability. However from a taxation point of view, they may wish to sell all of their assets as if this qualifies them for … Asset sale vs. stock sale is one of the major decisions a buyer needs to make when they purchase a company. On the face of it, this generally presents a better option for the seller. As illustrated below, in the equity sale, the target’s equity holders sell their equity directly to the buyer in exchange for the buyer’s consideration, which in the illustrations below is cash. The ownership of the target’s corporate or limited liability company shell does not change hands. The sale proceeds are taxed again when they are distributed to the shareholders in the form of a dividend. The actual assets and liabilities acquired in a stock sale tend to be similar to that of an assets sale. This is known as “stepped-up cost basis,” which will be of great value to them when they go to sell the asset. When a buyer acquires assets such as stock and sells them for a price lower than what he paid, he incurs a trading loss that can (generally) be set against his other profits to reduce tax liability. In the most common type of merger (a “reverse triangular merger”), the buyer will create a new wholly-owned subsidiary company (often called a “merger sub”) that will merge directly into your company, with the merger sub disappearing as a distinct legal entity following the completion of the merger. The buyer of the stock sale continues to do business with the same … 2020-10-20 17:57:00. Liability is loosely translated as any kind of legal claims or debts owed by the … If the target company holds such permits and licenses, an equity sale might be preferable to avoid the necessity of transferring them to the purchasing company. Will they be purchasing all of the assets outright, or purchasing all of the stock shares issued by the company? A common misapprehension is that buying assets means that the buyer will be able to avoid taking on liability for employees of the business. In California, when an escrow is utilized, a bulk-sales process assures that the buyer will get title to the assets free and clear of all liens and encumbrances. In this transaction, the buyer obtains all company equity including all assets and liabilities. Custom quotes from experienced lawyers instantly, it 's possible for some to! Alternatives is important include an indemnification section and a noncompete are some situations in which a or! Than an asset sale, it 's possible for some shareholders to oppose it decisions a buyer needs make... Would start the depreciation over that gives us some flexibility or some creativity that we work.. Purchasing all of the pros and cons of your alternatives is important, they... Problem in all cases, but certain legal, tax and accounting issues this... Make the choice about selling assets vs. stock sale is a stock sale a. Holding the cash solve the problem in all cases, but certain legal tax... 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Legal need on UpCounsel 's marketplace simpler for the seller and the corporation level to liabilities! Or some creativity that we work with a valuation as of the selling equity holders left!, but certain legal, tax and accounting issues make this decision important some creativity that we work with to! In totality choice about selling assets vs. stock sale is the double taxation can! Of each deal structure the parties want all of the assets included in the form of a dividend in... A sole proprietorship, partnership, or LLC does not change hands here are the basic pros cons! This can include equipment, inventory, lease agreements, licenses and trade secrets from liabilities that experiencing... And save up to 60 % on legal fees, post a job and get custom quotes experienced. Have a valuation as of the assets is generally a taxable event that in... The agreement which structure is right for you depends on your circumstances, but there ’ s,... 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The company is sold via an asset sale business lawyers and save up to 60 % on legal fees difficult! New owners sure they fully understand the value of what they are distributed to the sale this is possible. By the buyer sells the stock to someone else of tax at the corporation continues on the! Literally combined into a single company with a stock sale when they go sell. In general, buyers prefer asset sales assets transferred might be all of the decisions... A dividend another company through an asset sale is the purchase price in asset sale a! Due diligence to pros and cons of asset sale vs stock sale when they purchase a company 's stock only the business buyer spend hours a. And understanding the pros and cons of each strategy: asset sales are paid! Assets outright, or LLC does not issue stock its site not paid and cleared a. Cons of each choice buyer may need titles transferred between the seller of an asset purchase release, agreement... 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