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Whether you plan on buying or selling a business, you need to be aware of the differences between an asset and a stock sale. An asset sale allows a buyer to acquire the company’s assets and liabilities, and a stock sale enables a buyer to purchase equity in the business by acquiring shares from one or more stockholders. It is important to remember that not all business entities have stock. For example, if you are buying an LLC, sole proprietorship, or a partnership, then a stock sale would not be possible. Incorporated businesses such as C-corporations and S-corporations could be purchased or sold through stock or assets sales.
Basic Considerations for an Asset Sale
To get a better understanding of what an asset sale is, imagine that you plan on buying a company that cleans offices. This company is going to come with both tangible and intangible assets. For instance, the company’s building (if they own it) and the equipment used to clean the offices are two examples of tangible assets. The business’s client list is an example of an intangible asset.
In an asset sale, the seller continues to own the legal entity. This is important to buyers because the seller will likely retain responsibility for legal liabilities such as past contractual breaches or defective products. If you purchase the assets from the cleaning company and a past client wants to file a lawsuit due to a contractual dispute, then the seller would have to handle the litigation.
There are also many reasons why a buyer may not want to pursue an asset sale. Transferring ownership of cleaning equipment will be significantly easier than migrating intellectual property, contractual agreements, and other intangible assets. Sellers will also face higher tax consequences during asset sales. Buyers, on the other hand, should speak to their attorneys about the significant tax benefits of an asset sale as well. During an acquisition, assets can be “stepped-up” to fair market value because it takes depreciation into account.
Understanding a Stock Sale
A stock sale centers on the buying and acquiring equity in a business through the company’s shareholders. If the cleaning company you intended to buy was incorporated, then the company maintains legal ownership of the assets after the sale. The amount of ownership you have in the company determines how much say in how those assets are used.
On the other hand, the proceeds from stock sales face a lower capital gains rate, which benefits the seller. Although transferring stock and ownership is less complicated than an asset sale, the buyer will likely assume many of the risks previously held by the seller. This needs to be discussed with your attorney because the purchase agreement can address who is responsible if litigation surfaces. Your attorney can negotiate and assign specific responsibilities to the seller if you face litigation for an issue the previous owner created.
Contact the Business Law Attorneys of Drucker & Mattia, PLLC
With over 35 years of combined experience, our attorneys possess a fundamental understanding of how to assist you with incorporating your business, choosing the right entity, or helping you buy or sell an existing business. Contact Drucker & Mattia, PLLC, to schedule a consultation to learn more about how we can help you accomplish your business goals.
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