When structuring the sale of your company, the transaction can be laid out one of two ways:
Asset Sale in which the buyer leaves you with the company legal entity and buys select hard and soft assets of the company, or
Stock Sale in which the buyer acquires the stock of your company, all the assets it controls and steps into your shoes in contractual obligations.
Most often the buyer will dictate the structure of the transaction n be the purchase and sale of corporate stock. As a rule of thumb smaller transactions tend to be asset purchases as it provides a firewall for any unknown liabilities not uncovered during due diligence. In most circumstances, the buyer will drive the choice between an asset sale or stock sale. About 30% of companies which are sold involve stock transactions according to DealStats.
What does it mean for you?
Asset Sale
There can be negative tax consequences including double taxation if your company is a C-Corp. Consult with your tax advisor to understand the full implications for you and your partners.
You retain the legal company entity which will hold the rump of assets and liabilities not covered under the sale agreement.
Stock Sale
The tax implications of a stock sale include treatment of the proceeds as capital gains, however Sell Side Quarterbacks always recommends discussing the tax implications with your tax advisor.
less responsible for future liabilities, such as product liability claims, contract claims, employee lawsuits, pensions, and benefit plans. However, the purchase agreement in a transaction can shift responsibilities back to you as the seller.
Fewer loose ends post transaction as you no longer own the company.
What is the buyer motivation to buy your company as an asset or stock sale?
Asset Sale
From a tax perspective it allows the buyer to step up the price of the assets and reduce future taxes when they sell the assets.
From a liability perspective, an asset sale firewalls the buyer from any unforeseen liabilities such as a sexual harassment suit arising from an event pre-close.
Stock Sale
A stock sale is simpler in transition as it does not require signing new contracts with employees, gaining regulatory approvals such as licenses which were issued to the company. If the business in question has a large number of copyrights or patents or if it has significant government or corporate contracts that are difficult to assign, a stock sale may be the better option because the corporation, not the owner, retains ownership. Also, if a company is dependent on a few large vendors or customers, a stock sale may reduce the risk of losing these contracts.
Buyers may accept more risk by purchasing the company’s stock, including all contingent risk that may be unknown or undisclosed.