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What are asset sales?

An asset sale is the purchase of individual assets and liabilities of a target company. In an asset sale, the seller retains legal ownership of the entity but no longer owns the assets sold. Assets can include equipment, goodwill, inventory, fixtures, leaseholds, licenses, patents and trademarks. Net working capital is usually included in this type of sale. This can consist of accounts payable, accounts receivables, inventory, prepaid expenses, and accrued expenses.

Generally, asset sales do not include cash.  The seller usually maintains long-term debt obligations, known as a cash-free or debt-free transactions.

Asset sales from a buyer’s viewpoint

“For a buyer, an asset sale is usually (but not always) better, as it will tend to cut off any undiscovered or outstanding liabilities that may exist. It will also tend to protect the buyer from any undiscovered oddities in the capital structure,” business attorney Ryan Reiffert told us. Asset sales also give buyers a tax advantage since they can step up the basis of several assets for depreciation and amortization.

However, asset sales also pose challenges to buyers; assets like intellectual property, leases and permits can be difficult to transfer. Issues such as legal ownership and third-party consents can also delay the transaction process.

Asset sales from a seller’s viewpoint

For sellers, asset sales result in higher taxes, which vary by state. That's because tangible assets are taxed at ordinary income tax rates. Intangible assets are often taxed at lower capital gains rates. Plus, if the entity is sold as a C-corporation or S-corporation that was initially a C-corporation, the asset sale could trigger even higher taxes.

Pros of asset sales

  • Tax advantage: Buyers can receive a step-up basis of assets acquired and obtain tax deductions for assets that depreciate faster and those that amortize slowly.
  • The buyer does not have to assume liabilities: The liabilities often remain the responsibility of the target company.
  • Easy to conduct due diligence: The buyer needs to spend less time and money conducting due diligence since exposure to unknown liabilities is limited.

Cons of asset sales

  • Double taxation: The seller may face a double layer of taxation since asset sales typically generate higher taxes.
  • Transferring some assets may be more complicated: Assets like intellectual property, permits and leases can be more difficult to transfer. Agreements surrounding these assets may need extra negotiation.

What are stock sales?

In a stock sale, the buyer purchases shares of stock from the target company’s shareholders, assuming all assets and liabilities. Unlike an asset sale, stock sales are an easier, less complex transaction since the buyer purchases the entire company.

It’s important to note that stock sales are not available in all transactions. If the business is a sole proprietorship, partnership or limited liability company, the transaction can’t be structured as a stock sale since these entities do not have stock.

However, these sales are limited to incorporated businesses, such as C-corporation and sub-S- corporations, where the buyer and the seller determine whether to structure the deal as an asset sale or stock sale.

Stock sales from a buyer’s viewpoint

In a stock sale, buyers neither receive step-up tax benefits nor the convenience of handpicking assets and liabilities. When the stock is sold, buyers lose their ability to re-depreciate the asset. Additionally, buyers may take all the liabilities that come with the company’s stock, whether unknown or undisclosed.

Stock sales from a seller’s viewpoint

Sellers often prefer stock sales because all the revenue is taxed at a lower capital gains tax rate. In some cases, corporate tax is bypassed. Sellers are sometimes less liable to future liabilities like employee lawsuits, contract claims and product liability claims.

Pros of stock sales

  • Transferring stock is less complicated: Unlike assets, transactions involved with stock sales are easier since the buyer purchases the entire entity, including its assets and liabilities. This means nothing has to be retitled.

Cons of stock sales

  • No step-up tax basis: Buyers do not receive step-up tax benefits of assets acquired.
  • Higher future tax for the buyer: Lower depreciation expense can lead to higher future taxes compared to an asset sale.
  • Liabilities become the responsibility of the new owner: Buyers may accept more risk by purchasing the target company’s equity, plus all the unknown or undisclosed liabilities.

The bottom line: how do they compare?

An asset sale is the purchase of individual assets and liabilities of a target company, while a stock sale is the acquisition of a company's equity including all the risks. Stock sales are always in favor of sellers, while asset sales are in favor of buyers.

Deciding whether to structure a deal as an asset sale vs a stock sale can be a complex process, especially when it comes to taxes. There are vast variations and complications involved in each type of sale. Different types of entity structures can pose different challenges. As such, you may want to talk to a professional tax advisor or legal advisor before proceeding.

About the Author

Lydia Kibet

Lydia Kibet

Freelance Contributor

Lydia Kibet is a freelance contributor for Moneywise.

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