Transaction Structure: Asset Sale vs. Stock Sale
Lincoln Law Firm Shares Insight
When purchasing or selling a business an initial decision is how to structure the deal. On a basic level, the two most common structures are (1) an asset sale or (2) a stock sale. In an asset sale, some or all of the assets may be sold but the underlying ownership of the selling corporation does not change. In a stock sale, no assets of the corporation are sold, instead the buyer purchases all of or a controlling stake of the ownership interests (i.e. shares) of the corporation in return for cash and/or other consideration to the selling shareholders.
 For purposes of this article, this overview is based on the buying and selling entities being corporations or entities taxed as corporations.
- Generally favored
- Purchase price is allocated among purchased assets and buyer receives a fair market value step-up basis, which generates higher depreciation deductions
- Buyer can “cherry-pick” which assets and liabilities it will purchase and assume
- Potentially problematic if seller has key contracts or permits that cannot be assigned without third party consents
- Generally disfavored
- Sale of “hard” assets (i.e. buildings, fixtures, equipment, etc.) likely subject to higher ordinary income tax rates
- If seller is a C-Corporation subject to double taxation (tax to corporation on sale of assets followed by tax to shareholders upon distribution of cash from sale)
- Further complexities if seller is an S-Corporation with “built-in gains”
- Does allow seller to retain assets and business lines within existing corporate structure
- Generally disfavored unless assignability issues exist
- No ability for buyer to receive a stepped-up basis in assets
- Buyer takes seller’s corporation “as-is” and inherits all liabilities, employee issues and other actions taken by seller in the past, known or unknown
- Risks can be mitigated by comprehensive representations and warranties by seller’s owners and indemnification provisions in the purchase agreement
- Generally favored
- Nothing changes but owners of stock
- Taxed at lower capital gains tax rates
- No agreements or permits to transfer
- More difficult to keep other business lines under corporation intact
This is a very high-level summary of only a few of the considerations. Additional factors will be relevant which may affect the benefits and ultimate structure of a transaction. It is always best to consult with experienced legal and tax counsel prior to deciding which structure to use.