My business brokerage firm is often asked this question. The differences are huge and they can be critical in the sale of small to medium size privately held businesses.
First, let’s define each. In an asset sale or acquisition, selected assets are bought from the selling entity by the buying entity. Those “selected assets” usually include all of the operating assets of the business and the intangibles (trade name, goodwill, etc.). No liabilities of the selling entity are assumed.
A corporate stock sale is just the opposite. The buyer purchases the outstanding shares of stock in the corporation held by the seller. The purchaser thereby assumes, through the stock acquisition, all of the assets and liabilities (known and unknown) of the company.
The same concept applies to a Limited Liability Company (LLC). Instead of shares of stock, the buyer purchases the seller’s membership in the LLC and thereby assumes the assets and liabilities of the company. In this article, when referring to corporate stock transactions, the same considerations apply to LLC membership transfers.
What are the advantages and disadvantages of each?
The critical advantage of an asset sale to the buyer of the business is that none of the UNKNOWN liabilities are assumed. The potential of unknown liabilities is the real problem.
I remember from my law school days, the typical textbook example is a slip and fall accident in a business. The owner of the businesses is unaware of the incident when he/she sells the company. A couple of years after the sale of the business, the accident victim files suit for damages. In a corporate stock sale, the new owner of the business is on the hook for that accident. Not so in an asset purchase.
It’s this kind of potential exposure that causes most lawyers for business buyers to strongly – very strongly – advise against a corporate stock purchase when acquiring a small to medium size privately held business.
Another advantage to the business buyer in an asset versus a corporate stock purchase is that the new owner of the business gets to set up the individual assets on a new depreciation schedule and start depreciating the assets all over again. This provides a significant tax deduction for several years.
In the acquisition of the corporate stock of a privately held business, the buyer assumes the existing corporate depreciation schedule in which, most likely, the assets have been fully depreciated, providing little to no tax shelter in the coming years.
On the other side of the table, an advantage to the seller in a corporate stock sale is that most of the proceeds of the sale are taxed at the lower capital gains rate.
However, 90-plus percent of the small to medium size privately held business ownership transfers that my firm has been involved in have been asset sales, primarily due to the liability exposure issue. I remember one instance when we nearly had to peel a lawyer off the ceiling when his client thought he might want to buy a business in a corporate stock acquisition!
As a practical matter, about the only time we get involved in a corporate stock sale is when the corporation holds licenses that are not transferrable. Durable medical equipment dealerships are an example with their licenses and contracts from Medicare, Medicaid and BlueCross-BlueShield.
Should you have any questions about this or other issues involved in business ownership transfers, don’t hesitate to call or email. Please be aware that I’m neither an attorney nor an accountant, but hey, I did spend the night in a Holiday Inn Express last week!
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