Buyers Like Asset Sales and Sellers Like Stock Sales

Sales of businesses are structured as either an asset sale or a stock sale. In an asset sale, the seller remains the owner of the legal entity and retains long-term debt obligations (unless specifically assumed by the buyer). In a stock sale, the buyer buys the entity and receives all the assets and assumes all the liabilities (subject to any negotiated exceptions).

One asset that is normally not included in either type of sale is cash, at least beyond a nominal amount needed by the business on a day-to-day basis. It makes little sense to sell cash.

“Normalized” working capital, specifically the normal level of accounts receivable and inventory (assets) and accounts payable (a liability), is usually included in an asset sale.

General Guideline: Buyers Like Asset Sales. With an asset sale structure, a buyer:

·      Can “step up” the basis over the current valuations of assets and get tax deductions in future years for depreciation and/or amortization of those assets.

·      Can amortize goodwill – the excess of what is paid over the value of tangible assets – on a straight-line basis over 15 years (versus a stock purchase where goodwill cannot be deducted until the stock is later sold by the buyer).

·      Can attempt to “cherry pick” the liabilities and assets it will assume in the transaction.

·      Can spend less time on due diligence because it is not exposing itself to unknown liabilities.

·      Can select which employees it wants to retain and which it does not want to retain.

The downsides of an asset sale for a buyer include:

·      Key business contracts will likely need to be re-executed and possibly renegotiated.

·      Assets may need to be retitled.

·      Employment agreements with employees may need to be renegotiated.

General Guideline: Sellers Like Stock Sales. With a stock sale structure, a seller:

·      Can generally achieve favorable capital gains treatment on the sale of stock versus ordinary income tax treatment on the sale of appreciated assets.

·      Can, at least theoretically, shed all liabilities associated with the business. (In practice, the ability to avoid liabilities is significantly limited by the operation of representations, warranties, and indemnifications made by the seller to the buyer.)

·      Can effectively force the sale upon minority shareholders who do not want to sell, absent contractual rights protecting minority investors.

·      Can, if not prohibited by contract, assign business contracts to the buyer without procuring consent of the third party to the contract.

As you might imagine, the advantages of one form to one party tend to be disadvantages to the other, and vice versa. Therefore, in practice, a stock transaction tends to incorporate negotiated elements that lessen the advantages to the seller, and an asset purchase transaction tends to incorporate elements that lessen the advantages to the buyer.

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