One of the major aspects of a business sale is whether the business will be sold as an asset or as stock. An owner might be thinking, “Does it really matter as long as I get the highest sales price?” Well, as you’ll see below, there are plenty of circumstances that can make a LOWER sales price MORE attractive. Before we dive into the differences though, it should be noted that a sole proprietor, partnership or LLC will be sold as an asset by default since these business structures do not have stock by nature. Even so, it is still important to understand the impact of an asset sale, and the comparison to a stock sale may help in deciding whether to incorporate to an S-Corp or C-Corp (which can be sold through either a stock or an asset sale).
To highlight some of the key differences between an asset and stock sale, I have summarized some important Tax, Business Liability and Complexity considerations below:
In a stock sale, the seller can realize the gain on his/her business at preferred capital gains tax rates. Alternatively, an asset sale exposes proceeds to the seller’s ordinary income tax rates on certain assets and if the company is sold as an asset through a C-Corp, the proceeds are exposed to double taxation (corporate tax and individual tax rates). The buyer on the other hand prefers an asset purchase from a tax perspective because they will have a “stepped up” basis, which allows for additional depreciation and/or limits the potential gain when the business will be sold again in the future.
Buying a business as an asset not only has tax benefits, but it reduces the buyer’s liability exposure as well. To protect themselves from a future lawsuit due to the previous owner’s negligence, for example, a buyer will prefer an asset sale. The opposite is then true for the seller, where they can still be held responsible for liabilities even after the business is sold, if it is sold as an asset. For a stock sale, the buyer retains most of the business’ liabilities, even if they are unknown. There are of course exceptions as to what liabilities are separated from the buyer, but generally speaking, an asset sale will limit the buyer’s exposure to business liabilities.
Complexity & Expenses
An asset sale is more complex and costlier. In an asset sale, the specific assets and liabilities transferring are stated, and the gain/loss is calculated on each asset. This complexity adds fees for appraisals, legal titling and accounting fees. Additionally, some assets are not transferable in an asset sale, which adds to the complexity (e.g. patent).
You can see now how receiving a lower sales price might be more attractive if you are able to recognize proceeds at a lower capital gains tax rate, while limiting your exposure to business liabilities and while saving fees and complications by structuring the business sale as a stock sale. If you would like to further discuss the implications of selling or buying a business and how it would fit into your financial plan, please reach out to your D3 advisor.
See below for a table illustrating some of the key differences between a stock and an asset sale:
—Brett Spencer MS, CFP®, CEPA