Determining the type of sale for selling your business is extremely important. An asset sale purchases a specific detailed list of business assets and liabilities. A stock sale requires buying the owners’ share of stock in the company and normally happens in an acquisition or merger with another corporation rather than an individual sale. Buyers usually prefer asset sales, while sellers favor stock sales. It all comes down to taxes and liabilities.
DealStats database reports that approximately 30% of all transactions are stock sales. This statistic varies drastically by company size. Smaller transactions are more often asset sales. All assets of the business are assigned values, not just “hard” assets. This means everything that the company owns, including:
- Name, trade names, and proprietary information
- Leaseholds and licenses
- Websites and social media accounts
- Telephone numbers
- Physical assets like equipment and fixtures
- Net working capital such as accounts receivable, accounts payable, accrued expenses, inventory, and prepaid expenses
- Intangible values like goodwill, impacting the sales price
If a business is a sole proprietorship, a partnership, or a limited liability company (LLC), these entities have no stock and must choose an asset sale. If the business is incorporated, as a C corporation or S corporation, the buyer and seller can decide whether the transaction will be an asset sale or a stock sale. The determination of which type of sale should always include the advice of each party’s CPA due to the tax implications.
If the buyer and seller agree to an asset sale, the business stock will NOT be part of the transaction. The buyer will set up their own tax ID associated with their desired business entity type (Sole Proprietorship, Partnership, LLC, or S Corp) and are NOT buying the existing Tax ID (TIN or EIN). The buyer also does NOT assume any of the business’s liabilities or any past or future legal claims – those stay with the seller.
The seller still has ownership of the legal entity, and the buyer purchases individual assets of the company.
Asset Sales for Small and Medium Businesses
Asset sales allow buyers to allocate a higher value to the company’s assets that depreciate quickly, like equipment, and lower values on assets that amortize gradually, such as goodwill. This creates additional tax benefits and improves the company’s cash flow during the first few critical years. Buyers also avoid inheriting potential liabilities, such as contract disputes, employee lawsuits, product liability, and product warranty issues.
The seller has flexibility in evaluating individual assets for favorable capital gain tax rates after the sale. Everything is negotiable. And there are numerous ways to reinvest gains to avoid negative tax consequences. Innovative business advisors let you strategize for the best possible scenario.
Asset sales can be a problem for buyers of larger companies with certain assets involving legal ownership and third-party consents, such as contracts, intellectual property, leases, and permits.
For sellers of corporations, asset sales generate higher taxes depending on the ratio of capital gains rates and ordinary income tax rates. The current federal rate is 22%, state rates vary, and the seller’s tax bracket dictates ordinary income rates.
Stock Sales for Corporations
In a stock sale, the buyer purchases the company stock directly to obtain the legal entity’s ownership. The buyer can ask to have specific assets and liabilities dispersed or paid off before the sale.
If the business has a large number of copyrights, patents, or government or corporate contracts to assign, a stock sale may be the better option because the corporation maintains ownership as well as liabilities.
Sellers may prefer stock sales because the profits are taxed at a lower capital gains rate, and they avoid corporate level taxes. Sellers are usually less responsible for future liabilities, including pensions and benefit plans. However, the buyer can negotiate a shift in responsibilities back to a seller.
At Vossmosis, we understand that every business exit is unique, and we provide tailored solutions to help entrepreneurs navigate this critical phase of their journey. Our team of experienced advisors can assist you in all aspects of your exit plan and develop a comprehensive exit strategy that aligns with your business and personal objectives. With our help, you can make informed decisions, maximize your business’s value, and achieve your exit goals with confidence.