Asset vs. Stock Sales:  The Basics

BY ADAM DOLL | HOPKINS & HUEBNER, P.C. | ADEL OFFICE

There are many different components to think about when buying or selling a business.  How much is the business worth?  What due diligence should the Buyer undertake?  When is the closing date? These issues and many others are certainly very important. However, one important item is often overlooked at the outset of the negotiations, whether to structure the sale of the business as an asset sale or a stock sale.  For various reasons, it is important for both the Buyer and the Seller to know what is being purchased:  is it the sale of business entity itself (“stock sale”) or is it a sale of all, or certain, of the Seller’s assets in that business entity (“asset sale”).  Knowing the difference between the two types of sales is very important when negotiating a sale. As a general rule, it is often beneficial for a Buyer to desire an asset sale, and a Seller to desire a stock sale. This is mainly due to certain tax benefits each type of sale provides. The tax benefit reasons are beyond the scope of this article to explain in detail, but in general center around the fact that in an asset sale, the Buyer will have the ability to fully depreciate hard assets purchased.  In a stock sale, oftentimes those same assets have already been fully depreciated out, and further depreciation deductions would be unavailable to the Buyer.Buyers also may find an asset sale more beneficial if they do not want to buy all of the Seller’s assets.  Remember, in a stock sale, the Buyer is simply buying all of the Seller’s stock in the company, and therefore will own all of the Seller’s assets (via ownership of the Seller’s company) at the completion of the sale.  It is easy to see that if the Seller has certain undesirable or unproductive assets, a Buyer would want to exclude those assets in an asset purchase.Although Buyers generally prefer asset purchases, a Buyer may favor a stock purchase if the Seller has desirable contracts.  In a stock purchase arrangement, the Buyer essentially steps into the shoes of the Seller.  For this reason, it is much easier to assume and maintain certain contracts, such as leases, if structured as a stock sale.  Due to the differing nature and tax treatment of the two types of sales described above, Buyers and Sellers oftentimes may place different values on the business depending on which structure is chosen.  I strongly encourage all parties to have an expert assist in the negotiations of business sales from the start.  The above analysis is just one factor that an attorney well-versed in business sales would analyze.