By Steve Michaels
Question: What’s the difference between an asset sale and a stock sale? Why does it matter?
Answer: An asset sale is the purchase of the assets of a business, which normally consists of the client list, equipment, furniture, fixtures, rights, good will, and a covenant not to compete. It does not include cash, and the buyer does not assume the liabilities. When a buyer purchases the assets only, the buyer has the option of depreciating that investment over a period of years. The buyer is also increasing the value of the business entity by being selective about the assets purchased from the seller in order to grow the revenue base. This may be the ideal way a buyer can comfortably increase an existing business without creating any major IRS tax implications. An asset sale is also subject to the Bulk Sales Act and sales tax issues.
A stock sale is the purchase of corporate stock or LLC shares from the owners and can also include cash. A stock sale includes everything on the balance sheet, both assets and liabilities. If the buyer needs a tax write-off, this may be a viable option. This creates a completely new entity for the buyer, and this affects the buyer’s federal tax position depending on what basis is created upon purchase. A stock sale involves buying the entire entity, so past financial and legal liabilities are included, creating a significant exposure to the buyer. Thus, financial debt and legal risk could play a factor in reducing the purchase price of the sale.
A stock sale is not subject to the Bulk Sales Act, but this can be a negative concern to the seller by creating a large federal tax obligation. In a stock sale, the buyer assumes the current depreciation schedule of assets and the existing tax status of the corporation. Loans to the owner and personal liabilities are normally removed. One reason for a stock sale is when there is a right, license, or exclusive distributorship that cannot be otherwise transferred.
The majority of buyers do not want to take on the liabilities of a company; therefore, they choose to purchase selected assets, giving them the opportunity to increase their revenue base without acquiring the seller’s liabilities.
Steve Michaels is a broker with TAS Marketing and can be contacted at 800-369-6126 or firstname.lastname@example.org for questions.
[From Connection Magazine – November 2010]