Stock sale vs asset sale: A critical decision

One of the biggest structural decisions during the sale of a company is choosing between a stock sale or asset sale. The tax differences can be dramatic, so it’s important to understand what, in fact, is being bought and sold. Is it the ownership interest of the business entity, a stock purchase? Or are only the assets of the business being transferred, an asset purchase?  Generally, sellers of C or S-corporations prefer stock purchases and buyers prefer an asset sale. 

 

In a stock purchase, all assets and liabilities of the company are sold and the buyer assumes the majority of obligations associated with past and future operations.  The proceeds are taxed at a lower capital gains rate, and in C-corporations the corporate level taxes are bypassed.

                                                                                                                                             

In an asset purchase, individually identified assets and liabilities are conveyed. This might involve tedious valuation of the seller's individual assets and liabilities, and the transaction can be mechanically complex. In a taxable asset sale of a C-Corp, the gain will be subject to tax at both the company and shareholder levels and, if an S-Corp, some or all of the gain may be reportable by the shareholders as ordinary income. In addition, the transaction may require sign off from customers whose contracts are considered an asset. Getting these sign-offs will typically delay closing and might even kill the deal.  The seller may not agree to bear the tax burden of an asset sale while the acquirer enjoys the benefit of a tax step-up, so in some cases the buyer may elect to pay a higher purchase price as compensation for the seller's tax liability, or structure a stock sale to look like an asset sale using a Section 338(h)(10) election.

 

Every transaction involves a unique set of circumstances and it’s important to closely analyze each transaction to determine whether a stock purchase or an asset purchase yields the most desirable outcome.  Experienced counsel is needed to take home the maximum from the sale of your company.

Posted by , Executive Vice President on 15 October 2015
What's My Company Worth?

 Subscribe

Recent Posts

Archived Posts