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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.[1]  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.

[1] For purposes of this article, this overview is based on the buying and selling entities being corporations or entities taxed as corporations.

Asset Sale

Buyer's Perspective

  • 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

Seller's Perspective

  • 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

Stock Sale

Buyer's Perspective

  • 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

Seller's Perspective

  • 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. 

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