Disclaimer: It is critical to consult tax and legal advisors to review your specific situation and make appropriate recommendations for your business. Each company is different and every transaction is unique. This should not be construed as legal or accounting advice, just general insight into the different transaction structures.
When considering the sale of your business, do you understand the difference between an asset sale and a stock sale? Over the next two posts, we’ll outline the merits of a stock sale and asset sale. You’ll hear how they are treated from a tax perspective and differences in how liabilities and assets are handled.
In a stock sale, the Buyer purchases the stock (or ownership interest) of the Company and all associated assets and liabilities. Because the title of each asset lies within the corporation, a stock sale typically does not require separate conveyances of individual assets (i.e. leases, contracts, permits). The asset titles transfer at the time sale, usually without required consent of third parties. For this reason, stock sales can be simpler for companies with a substantial amount of complex contracts (government or corporate) or intangible assets (copyrights, patents, intellectual property). Stock sales eliminate the need for tedious valuations of individual assets, and the Buyer can choose to contractually designate certain unwanted assets and liabilities back to the Seller to distribute or pay off prior to the sale.
Stock Sale: Liability and Tax Effects (Favor the Seller)
In a stock sale, the Buyer assumes all liabilities that convey under the title of the corporation at the time of sale. Risk is transferred from Seller to Buyer so the Buyer will do extra diligence to confirm they have protection from any open or potential liabilities (lawsuits, environmental, employee, warranty claims, etc.). This Buyer risk can be mitigated through the reps, warranties and indemnifications of the purchase agreement. Tax implications also favor the Seller, as the book value of assets determines the depreciation basis for the new owner, eliminating the ability to re-depreciate certain assets, which often occurs in an asset sale. In addition, a stock sale means the Seller gets the benefit of lower capital gains rates on their proceeds and often certain state-specific taxes imposed on the sale of assets can be avoided.
Next post, you’ll uncover the merits of an asset sale and how it affects the Buyer and Seller.