Buying or Selling a Business as an Asset Sale vs a Stock Sale: What’s The Difference?

What Type Of Business Sale Option Is Best For You?

If you are thinking about buying or selling a business, you might not know of the different types of business sale options. Most businesses are sold as either an asset sale or a stock sale. An experienced Chandler business broker has probably been involved with both types of sale structures and, along with your CPA, can help you decide which type of sale might be best for you.

What is an Asset Sale?

In most cases, when you sell your business to another party, the buyer is not actually buying your corporation. Instead, they form their own corporation or LLC and then transfer your assets to their new company once the sale is completed. Most business sales include a purchase of the trade/brand name that you’ve created, even though the buyer will be forming their own new entity.

After an asset sale, the new buyer will need to create new employment contracts with any employees they will be retaining as well as transfer all of the business’s supplier and vendor contracts, lease agreements, and other contractual obligations to their new entity.

An asset sale gives the buyer a clean slate even if they continue using the old company’s name. The new buyer will have no responsibility for the debts and other liabilities that belong to the former corporation because they are only acquiring the company’s assets. One caveat however, in Arizona, if the former owner didn’t pay their sales tax, that will become a successor liability for the new owner even in an asset sale. Buyer’s need to make sure they get a letter of Good Standing from the AZ Department of Revenue showing the seller is up to date on their sales taxes.

What’s Included With An Asset Sale?

Every business sale contract can be negotiated, but assets that are usually included in the purchase price include furniture, fixtures, equipment, and vehicles. Inventory is also typically included but may be separated so that the buyer only pays for the actual amount of inventory available at the time of closing. Trade secrets, recipes, logos, websites, and customer lists are also commonly included in an asset sale.

What Is A Stock Sale?

Naturally, people who are buying a business will ask their business broker why not just purchase the stock of the existing corporation instead of going through all the extra work of setting up a new entity and transferring everything over to it? Unfortunately, a stock sale can end up requiring a lot of extra paperwork and legal fees, and the buyer’s attorney will typically prefer an asset sale because it will relieve the buyer of any responsibility for lawsuits and liabilities that may be attached to the previous corporation. Liabilities related to the corporation stay with the new owner in a stock sale.

In a stock sale, the new buyer purchases the stock of the seller’s existing corporation instead of setting up a new entity and transferring everything over to it. By purchasing the shareholder’s stock, it gives the buyer direct ownership through the seller’s legal equity. Both the assets and the liabilities of the corporation are transferred to the new owner, in a stock sale. Because there is some added risk to the new buyer in a stock sale, the buyer’s attorney will usually want the seller to indemnify the buyer from any lawsuits, potential lawsuits, or undisclosed liabilities of the seller. Additionally, the seller will probably not receive all of the funds at closing in order to ensure that no hidden liabilities pop up later. The legal fees in a stock sale are usually much higher than in an Asset Sale.

Stock sales are more likely to occur in situations where an asset sale may be complicated or especially expensive, such as when there are significant software licensing issues, the landlord is unwilling to transfer a lease to a new buyer, vendors would be unwilling to discuss contracts with a new corporation, a license is needed to run the business and can only be transferred through a stock sale, or when the company has a very large number of contracts that would need to be renegotiated.

Sometimes a business transaction will start as an asset sale and then transition into a stock sale, while others will begin and conclude as a stock sale.

Is an Asset Sale or Stock Sale Better?

There are advantages and disadvantages to each type of sale, so it’s best to consult with experienced Glendale business broker to discuss the best option.

The tax implications are one of the most important considerations for business sellers. In an asset sale, the old corporation must pay capital gains tax and sometimes ordinary income tax on the sale of the assets, making an asset sale a more expensive option for the seller. When it comes to stock sales, buyers acquire the company’s tax basis. As a result, the seller’s tax liability is usually reduced. This means that from a taxation standpoint, a stock sale tends to be better for the seller, while buyers may prefer an asset sale.

Stock sales offer the advantage of being more straightforward transfers, with less paperwork and generally fewer complications for both the buyer and the seller. The cash goes directly to the shareholder(s). In contrast, an asset sale can be more advantageous to a buyer. Because they are forming their own new corporation, there is no risk of any unknown liabilities or lawsuits that may be associated with the previous entity. However, in an asset sale, the transaction tends to involve the time and expense of new contract negotiation with employees, vendors, suppliers, landlords, and other individuals.

Learn More About Selling Your Phoenix Business with a Confidential Consultation

If you are thinking about selling your business, you need an experienced certified business intermediary on your side for the best outcome. You can avoid common complications and work toward the highest sales price when you consult with Phil Reese, Arizona’s leading business broker. With many years of experience, and a history of success, Phil Reese has what it takes to help you sell your business profitably. Contact us to chedule your consultation today!