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Selling Your Business: Asset vs. Stock Sale

On behalf of Sayer Regan & Thayer of Sayer Regan & Thayer, LLP posted on Monday, September 27, 2021.

If you are planning to sell your company or corporation, you may be wondering how you should ideally approach the sale. How you approach it will depend on what you are trying to accomplish and what both parties think works best. Put simply, an asset sale is when a business sells all or just a portion of its assets. The seller (target company) remains the legal owner of the company, but he or she no longer owns the assets that have been sold. In a stock sale, the buyer will acquire equity from the target company’s (seller’s) shareholders.

It’s a good idea to consult with a business lawyer before choosing one or the other. Let’s delve further into what each type of sale is.  

Asset Sale

In an asset sale, the seller remains the legal owner of the entity, and the buyer is responsible for purchasing individual assets of said company, such as licenses, equipment, customer lists, and inventory. Asset sales usually don’t include purchasing the target company’s cash, with the seller retaining its long-term obligations to debt. Asset sales are cash-free and debt-free.

Pros of Asset Sale

• The buyer receives a step-up on tax basis of assets that have been acquired

• The buyer doesn’t have to assume the target company’s liabilities

Cons of Asset Sale

• The seller has to undergo double layer of taxation

• Transferring assets is complex

• Agreements about certain assets may have to be renegotiated

Stock Sale

In this type of sale, the buyer gets the equity from the target company’s shareholders, and it’s a simpler concept than asset purchases. Overall, it’s a simpler and less complicated transaction, hence its popularity. The acquirer purchases the stock of the target company, taking it as it is in terms of assets and liabilities. Most contracts will be transferred to the new owner automatically.

Pros of a Stock Purchase

• The acquirer doesn’t need to contend with expensive re-valuations and retitles of assets.

• Buyers are able to assume non-assignable licenses and permits without getting consent.

• Buyers don’t have to pay transfer taxes.

• More common and simpler to use than asset acquisition.

• Cash goes directly to the shareholders

Pros of a Stock Purchase

• The acquirer doesn’t receive the “step-up” tax benefit or the ability to handpick assets and liabilities.

• All assets and liabilities are transferred at carrying value.

• To get rid of unwanted liabilities, separate agreements must be created whereby the target company takes them back.

• Applicable securities laws can complicate the process, especially when many shareholders are involved. And because some shareholders may not be willing to sell their shares, the process can drag on and on, increasing the cost of acquisition.

It’s important that both parties consider the benefits and drawbacks of each type of sale, backed by advice from their lawyers and financial advisors.

Selling Your Business? Contact Sayer, Regan & Thayer LLP First!

Planning to sell your business? Get expert legal advice first. We can help with a free, no-obligation consultation when you contact us toll free at 866-378-5836 or 401-324-9915.

These materials have been prepared by SRT for informational purposes only and are not intended and should not be construed as legal advice.

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