Stock vs Asset Sale

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Reply by a searcher
from University of Illinois at Urbana in Naperville, IL, USA

You can get a pretty good rundown by just asking something like chat GPT. But the basics of it are this

Sellers often want a stock sale particularly in situations where they can have qualified small business stock. Essentially there are options for reducing or completely avoiding capital gains tax on the sale. It also is a complete sale of the entity which transfers all liabilities along with the business to the new owner whether that's lawsuits or tax liabilities or environmental liabilities.

Buyers often want an asset sale obviously to avoid the liabilities but on their side it also allows for depreciation of assets acquired to get a bit of a restart. When the existing business has chosen to accelerate the depreciation of their hard assets then the economic gain from that depreciation is all gone if you do a stock purchase. The asset purchase revalues those assets as a fresh purchase for the new entity and allows you to depreciate which lets you offset earnings and reduce your tax burden.

Aside from these two basics there are also particular circumstances for specific businesses that come into play. Sometimes there are contracts that are not assignable without significant work especially if there are lots of them, or there is licensure that is difficult to reestablish under a new entity and is better off being passed through a stock sale. When this kind of thing forces a stock sale then it should be a part of the negotiation to recognize the benefits that the seller may accrue in limiting their liability or tax burden or simply reducing your option for utilizing depreciation.

A smart way to handle this is to think about putting parts of the purchase price and escrow to cover potential liabilities that crop up especially if the seller is insisting that there won't be any issues. If that's the case then why not set some of the purchase price aside to deal with it if it comes up, they shouldn't have to worry about it because they're insisting there won't be any issues. The seller may offer to simply put it in the warranties in the agreement that they are guaranteeing that there won't be any of these issues or they will indemnify you. But just remember that control of the cash is always better than an obligation and a legal document which would require significant legal investment in order to enforce.

There's a decent book called The art of m&A due diligence which explains a number of these concepts but it's kind of woven throughout the book.

I haven't found a single resource that claims to be comprehensive on all aspects of the two different transaction types.

I know there are a number of hybrid approaches where you could do things like purchase assets to another entity thus removing them from the transaction with the stock, or doing a F reorganization of the company which can allow you to make a stock purchase while being able to depreciate the acquisition of the assets.

So there are a lot of flavors of this process that you would truly benefit from expert advice on since these choices are often very particular to the complexity and cost associated with the more intricate transactions versus the benefits.

Reply by a searcher
from University of Illinois at Urbana in Naperville, IL, USA

Great answers here already. I'm going to add an idea for consideration. I haven't vetted this with a deal team, so take it as something to look into.

You could possibly consider a hybrid approach as well. TLDR; do an asset purchase to an LLC for all tangible assets. Purchase the shares in the remaining operating business to a separate entity like an S or C corp.

Typical reasons I hear for a stock purchase are licensure and unassignable contracts. When that comes into play it generally becomes a show stopper. You have to do it.

You lose the ability to reset the depreciation of assets, though. In this hybrid model you STILL would not have the ability to depreciate good will - and that MAY be significant if you assign alot of value to that. But I ~think~ you would be able to depreciate the hard assets.

Additionally, a down side of the stock purchase is that you inherit liability. This hybrid approach REMOVES key assets from the operating company and places them in a separate company, protecting them from liabilities that come home to roost on the stock purchased entity.

If there aren't many tangible assets in the type of business you are buying then this may not matter very much, but it could.

Negotiating with the seller to make sure the balance of purchase price versus tax advantages/disadvantages from this structure has to be handled. Also, I think that maintaining the books going forward gets a little more complicated. But it could be worth it.

You would need to review this with qualified professionals, but it may add something to the idea list.

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