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SELLING A BUSINESS? IS A STOCK SALE OR ASSET SALE RIGHT FOR YOU?

in 1) Business Law

Are you thinking of selling your business? If your business is incorporated, then one of the first issues that you will have to consider is whether you should sell the assets of the business (both tangible and intangible) or the shares of the corporation that operates the business. The decision to pursue a stock sale versus an asset sale is complex. Each of these approaches has certain advantages and disadvantages for the seller:

Stock Sale

There are several advantages for the seller of a stock sale. The most common ones are:

  • The ability to possibly use capital gains exemptions to reduce taxes payable on the purchase price received
  • Favorable tax treatment of the sale proceeds (as a capital gain)
  • Not retaining any liabilities of the business, including liabilities in connection with the possible termination of employees
  • A less complicated legal transaction

The disadvantages for the seller include:

  • The inability to retain any existing losses of the corporation
  • The inability to retain certain assets (including A/R and cash-on-hand), unless transferred out of the corporation prior to closing

Asset Sale

The advantages of an asset sale for the seller include the following:

  • The ability to retain certain assets that you do not want to include as part of the sale (i.e. A/R, security deposits, cash-on-hand)
  • Possibly using certain losses in the corporation to offset the income arising on the sale of the assets
  • A more favorable structure if selling one division of a corporation while retaining another

There are several disadvantages for the seller as well including:

  • Any liabilities of the business not specifically assumed by the buyer will remain the responsibility of the seller
  • Having to obtain third party consents to transfer certain assets to the buyer (i.e. real estate lease)
  • Possibly being left with unwanted assets which may be hard to dispose of when not selling the business as a complete package (such as obsolete inventory or equipment, or aged accounts receivable)
  • Possibly having to terminate employees that the buyer does not want to retain, and being obligated to pay them severance or other benefits
  • At least some part of sale proceeds will be treated as ordinary income, rather than as a capital gain subject to higher tax rates
  • A more complicated legal transaction

Additional considerations

Typically, the seller will want to sell shares in the company in order to take advantage of the capital gains exemption, while a buyer will prefer to buy assets to limit its liabilities. In most instances, a buyer will only be willing to proceed with the transaction if it can purchase assets. In such instance, you may be able to insist upon a higher purchase price to make up for the lost tax savings on an asset sale. Similarly, if you insist upon a share sale, you may be able to offer a slightly lower sale price to make the deal more attractive to a potential buyer, while still realizing more after tax money than if you had completed an asset sale.

Ultimately, the question of whether to use a stock sale versus an asset sale will depend on the specific circumstances of the business and the parties. Business owners should work with an experienced attorney and accountant to analyze the potential ramifications of each approach before they put their business on the market.

If you’re considering selling your business, contact us for a consultation.

Want to read more? Check out our blog post on Getting Your Business Ready for Sale.

You can also contact us to receive our free guide to The Legal Issues of Selling a Business.