Should You Go for Asset Sale or Stock Sale in a Business Acquisition?

Two ways to structure the sale of a business are selling assets vs. selling equity. You need to be clear on both when looking to buy or sell a company or small business.

When considering a business sale structure, both buyers and sellers should not only understand the pros and cons of asset vs stock sales, but also consult with professionals in their fields as necessary, because every business transaction is unique and differs from others.

An asset sale entails the process of a company selling some or all of its actual assets, either tangible or intangible. It is considered complete when the assets of a company are bought by the buyer. Although the seller still takes the responsibility of owning the company, legally they no longer own the assets sold.

Stock sales, on the other hand, include a series of transactions, where the individual and/or group of related individuals acquire from stockholders of the company shares representing more than fifty percent (50%) of the outstanding voting power of the company.

Both asset and stock sales are the most common types of acquisition structures today.

Selling Assets vs. Selling Equity

In general, an asset sale and a stock sale are different types of transactions. However, they are both related to the ownership of assets.

Asset Sales

Before planning asset sales, it’s important to know the pros and cons.

In a single asset sales process:

The buyer receives a step-up on basis of assets acquired.
Gains “Quick Money” (once everything is finalized).
Gains rapid disposal of assets.
The buyer usually does not have to deal with the liabilities of the target company.

Now, let’s explore the asset sale advantages both from the perspective of buyer and seller.

The seller:

Has the freedom of setting up sale prices.
Controls the business legally (even after the purchase is done).

The buyer:

May purchase the specific assets they want.
Asset purchases protect them from being held responsible for any liabilities of the existing business.

Stock Sales

In a stock sale, the buyer gets the equity from the target company’s shareholders. The primary privilege of stock sales over asset sales is that stock sales do not involve extra negotiation processes over long-term contracts with customers.

Stock Sales: Advantages

Stock sales offer some advantages, such as:

The cash from the sales directly goes to the shareholders.
Stock-related transactions are rather easy than asset-related ones.

Buyer’s viewpoint:

When purchasing a company’s stock, there’s a higher risk for buyers to buy into unforeseen challenges. For example, there can be contingent risks that may be unknown or undisclosed. Nevertheless, if the buying company has a large amount of government or corporate contracts that are difficult to assign, stock sales should be the best option for the company.

Moreover, if the company works with a big number of vendors and customers, the stock sale may reduce the risk of losing these contracts.

Seller’s viewpoint:

Sellers usually give preference to stock sales, because stock sales-related processes are taxed at a lower capital gains rate. Besides, they don’t take heavy responsibility for future liabilities, such as contract claims, employee lawsuits, product liability claims, pensions, and benefit plans.

So, Should You Go with Asset Sale or Stock Sale?

Approaching the sales process completely depends on each entity participating in the process. As already mentioned, both the asset and stock sales are considered to be subgroups of acquisitions.

If you seek this process to be done accurately and efficiently, then it’s advisable to consult with professional business acquisitions experts. The experts will help you solve the asset sale vs stock sale dilemma in your favor. Reputable professionals can also offer:

M&A Tax Services,
Global Tax Services,
Advisory Services and ensure their complete provision.

That said, buyers generally prefer asset sales, whereas sellers prefer stock sales. Buyers prefer asset sales because they can avoid inheriting potential liability in a stock sale. An asset sale deals with fewer risks for a buyer since liabilities and contingent expenses stay with the selling company.

As a seller, on the other hand, you might be better off with stock sales because the amount of equity sold receives treatment as a capital gain, which comes with a tax advantage. Capital gains generally receive a much lower tax rate than ordinary income tax rates, often 20% lower.

Both approaches nevertheless get you to the same place, but asset sales and stock sales both do come with certain liabilities and implications, including potential legal and tax ramifications. So, weigh all the pros and cons as mentioned above carefully before making the final decision.