Asset Sale vs. Stock Sale
Deciding whether to structure a business sale as an asset sale or a stock sale is complicated because the parties involved benefit from opposing structures. Generally, buyers prefer asset sales, whereas sellers prefer stock sales. An asset sale is the purchase of individual assets and liabilities, whereas a stock sale is the purchase of the owner's shares of a corporation. While there are many considerations when negotiating the type of transaction, tax implications and potential liabilities are the primary concerns.
In an asset sale, the seller retains possession of the legal entity and the buyer purchases individual assets of the company, such as equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, telephone numbers, and inventory. Asset sales generally do not include cash and the seller typically retains the long-term debt obligations. This is commonly referred to as a cash-free, debt-free transaction. Normalized net working capital is also typically included in a sale. Net working capital often includes accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses.
With a stock sale, the buyer purchases the selling shareholders' stock directly thereby obtaining ownership in the seller's legal entity. The actual assets and liabilities acquired in a stock sale tend to be similar to that of an assets sale. Assets and liabilities not desired by the buyer will be distributed or paid off prior to the sale. Unlike an asset sale, stock sales do not require numerous separate conveyances of each individual asset because the title of each asset lies within the corporation.
With a stock sale, buyers will be accepting more risk by purchasing the company's stock, including all contingent risk that may be unknown or undisclosed. These potential liabilities can be mitigated in the stock purchase agreement through representations and warranties and indemnifications.
Based on an analysis of marketplace transactions from the Pratt's Stats database, approximately 30% of all transactions were stock sales. However, this figure varies significantly by company size, with larger transactions having a greater likelihood of being stock sales.