Stock Sale vs. Asset Sale - [Comprehensive Comparison]

Are you ready to sell your business but have trouble deciding between an asset sale and a stock sale? You aren't alone, and the asset sale vs. stock sale dilemma is challenging.

We've found that one is ideal for business sellers who want to generate more demand and a higher sale price, and the other is for those who want more favorable tax terms.

If you can't decide between a higher sale price and more favorable tax terms, we're here to help.

At Exitwise, we help you choose and work with the best M&A experts who help you value your company, find a buyer, negotiate a suitable deal structure, and close the sale at the best price possible. Such experts include business brokers, accountants, legal counsels, investment bankers, and wealth advisors.

Chat with our M&A advisor today to get the help you need to find the right experts to sell your company quickly at favorable terms.

TL;DR - Stock Sale vs. Asset Sale

Stock Sale	Asset Sale
A stock sale is a transaction in which a buyer directly purchases the owners’ shares and obtains the seller's legal entity and identity.	An asset sale of a business is a transaction in which a business sells a portion or all of its assets and liabilities.
Pros	Pros
Less taxation because shareholders pocket the cash and are taxed individually. The seller typically passes more risk to the buyer. Assigning assets is easier because their ownership remains with the corporation. No need for extra negotiations over contracts as they pass to the buyer automatically.	The seller can retain some assets. You can sell at a higher price provided capital gains tax and ordinary income tax won't take up all the extra money. There's only one round of taxation if you are selling a partnership, sole proprietorship, or LLC. Buyers love asset sales, leading to more demand and potentially a higher sale price.
Cons	Cons
The deal may drag out if some shareholders refuse to sell their stocks, and the buyer may leave. The sale price lowers because buyers negotiate more to compensate for the tax benefits they forgo. The seller may need separate agreements to take back any liabilities the buyer refuses.	C corporations face double taxation at the company level and shareholders’ level. Transferring assets can be challenging. Assigning asset valuations individually can be challenging. The seller typically retains the liabilities.
Best For	Best For
Best for C corporations and S corporations because they have stock.	Best for LLCs, sole proprietorships, and partnerships.

What is a Stock Sale?

A stock sale is a transaction in which a buyer directly purchases the owners’ shares and obtains the seller's legal entity and identity.

The entity includes the assets and known liabilities the buyer wants, operations, contracts, and any unknown liabilities.

Unless the sale agreement states otherwise, the buyer retains the seller's identity, such as the company's name and legal status.

Microsoft's 2016 $26.2 billion acquisition of LinkedIn is a good example of a stock sale.

How Long Does it Take a Stock Sale to Settle?

After you put the business on the market, it can take three months to a year to complete a stock sale. The closing itself typically takes two to three months.

At Exitwise, we work with you to connect with M&A experts who can help you sell at the best valuation. These experts have a ready pool of potential buyers to whom they market your business so you can sell sooner.

What is an Asset Sale of a Business?

An asset sale of a business is a transaction in which a business sells a portion or all of its assets and liabilities. The seller will still own the business legally but without the sold assets.

How Does an Asset Sale Work?

In an asset sale, the seller sells part or all of their liabilities and assets but retains ownership of the legal entity and long-term liabilities.

Some assets and liabilities the buyer may buy include:

Inventory
Equipment and fixtures
Company phone numbers
Trade names and secrets
Leaseholds
Goodwill
Short-term liabilities like accounts payable
All contingent risks, such as pensions, lawsuits, employee issues, and environmental concerns.

How to Allocate Purchase Price in Asset Sale

The purchase price helps determine the taxes the seller owes, the buyer's tax basis, and the resultant IRS reporting requirements.

Here’s what the allocation process looks like:

Calculating the actual value of each tangible asset and the assumed liabilities.
Calculating the value of net identifiable assets (including intangible assets) as the Total Value of Assets minus the Total Value of Liabilities.
Factoring in the taxable goodwill as the excess amount paid above the company's net value of assets.
Agreeing with the buyer and adjusting the acquired assets and assumed liabilities to fair values. Try to allocate the purchase price to asset classes subject to capital gains tax.

Allocating the purchase price in an asset acquisition is difficult. We at Exitwise can help you connect with qualified M&A professionals who will ensure a smooth closing and the maximum possible business value.

Stock Sale vs. Asset Sale Tax Implications

The stock deal vs. asset deal dilemma includes the tax considerations for you as the seller, which affect how much you'll owe Uncle Sam after the sale.

Let's see the tax implications of each sale structure.

Stock Sale Tax Implications

The following aspects apply when you structure the sale as a stock deal:

Your proceeds are taxed at a lower long-term capital gains rate if you’ve held your interest in the business for over one year. A 20% top tax rate will apply.
You may also pay a federal net investment income tax (NIIT) of 3.8% against capital gains.
As a C corporation, you can bypass the corporate-level taxes.
The historical tax basis of your company's assets is retained, meaning the buyer loses the benefit of amortization and depreciation tax deductions. You have the advantage here.

However, if the buyer opts for a 338(h) (10) election, they may get a stepped-up cost basis for amortizing and depreciating the acquired assets annually. Your taxes will increase in this case.

Asset Sale Tax Implications

The aspects below apply when you structure your business sale as an asset sale:

You’ll pay more in taxes. Capital gains tax will apply to your intangible assets, such as goodwill. Tangible assets attract both, capital gains tax and ordinary income tax of up to 37%, depending on your tax bracket.
You'll need to allocate more value to intangibles because the tax on tangible assets is higher, while the capital gains tax on intangible assets is lower.
If you are a C corporation, the sale will attract double taxation. You'll be taxed at the corporate level, and the individual shareholders will also get a dividend tax.
As an LLC, sole proprietorship, or partnership, you'll be taxed once. However, your tax rate may be higher than the capital gains rate in a stock deal.

Relevant Characteristics Between Stock Sale and Asset Sale

Now that we know what stock sales and asset deals are, let's check out their comparable characteristics:

	Stock Sale	Asset Sale
Liability Assumption	All liabilities automatically pass to the buyer.	The seller retains long-term liability. The buyer may assume some short-term liabilities.
Depreciation and Amortization	The buyer doesn't re-depreciate or amortize unless they use a 338(h) (10) election.	The buyer applies a stepped-up cost basis to re-depreciate or amortize assets.
Financing Considerations	The buyer usually pays in cash from their cash reserves or a loan. A mix of cash payment and stock swap may apply.	The buyer may pay in cash from cash reserves or a loan. A stock-for-stock swap may apply.
Purchase Price Allocation	Both seller and buyer conduct the allocation for IRS reporting.	Both seller and buyer conduct the allocation for IRS reporting.
Closing Procedures and Complexity	Closing procedures are easier because the buyer assumes all assets and liabilities.	Closing procedures are complex because transfers may be limiting.
Flexibility in Asset Management	The buyer takes all assets.	The seller has to liquidate or dispose of some assets.

Similarities and Differences

What differences and similarities do asset sales and stock sales have?

Asset Sale and Stock Sale Differences

Here's how asset sales and stock sales differ:

Closing procedures: Asset sales are more complicated to close, especially when transferring contracts and titles of assets. In stock sales, closing is easier as the buyer automatically takes up all assets, liabilities, and contracts as they are.
Asset management: In an asset sale, the seller has to dispose of or liquidate the assets the buyer doesn't buy. In a stock sale, the buyer takes up all assets, and the seller no longer controls them.
Depreciation and amortization: In a stock sale, the buyer doesn't benefit from depreciation and amortization, but they do in an asset sale.

Stock Sale and Asset Sale Similarities

The following similarities apply in stock acquisitions and asset deals:

Liability assumption: In both, the buyer assumes liabilities. However, these are only short-term ones in an asset sale.
Payment and financing options: The buyer can make payments using various financing options. Cash may be from their company reserves or loans. The buyer may also offer stock in their other company or the new one they buy.
Purchase price allocation: The buyer and seller make their allocations and report them to the IRS. Both should consider agreeing before the reporting.

What About Equity Sale?

An equity sale is the same as an asset sale.

When Would You Choose an Asset or Stock Sale?

You'll want to choose an asset sale if:

You’re targeting a higher purchase price and have highly valuable intangible assets
You’re an LLC, sole proprietorship, or partnership and want only one level of taxation
You want to generate more demand and potentially a higher price (most buyers prefer asset sales)
The buyer insists on an asset sale, and you have no otherwise.

You'll want to choose a stock sale if:

You want more favorable taxation, such as avoiding double taxation
You want to sell your business sooner
All shareholders are willing to sell their shares
You want the buyer to take up all your assets and liabilities. (Assuming they don't negotiate to not buy some liabilities.)

Frequently Asked Questions (FAQs)

Here are common questions for further consideration before deciding on a deal structure.

What Legal Considerations Are There in a Stock Sale Versus an Asset Sale?

A stock sale has the following legal considerations:

The buyer takes up all legal liabilities and obligations (If they don't negotiate.)
The buyer takes up all contractual obligations and debts.

An asset sale carries the following legal considerations:

Assignable contracts will be transferred, and the unassignable ones will be renegotiated
The buyer may only assume legal liabilities they explicitly accept
The selling company typically retains its legal entity, legal structure, and any liabilities or assets not sold.

How Does a Stock Sale Affect Company Liabilities?

A stock sale shifts all liabilities to the buyer, which benefits the selling company.

How Does an Asset Sale Influence the Transfer of Contracts?

An asset sale requires transferring all contracts to the new owner, which is easy if they are assignable. If unassignable, you can renegotiate. Some customers or vendors may choose to cancel their contracts rather than transfer.

What Role Does Due Diligence Play in Stock Sales and Asset Sales?

Due diligence is crucial in both stock and asset sales in the ways below:

In both deal structures, it helps the seller and buyer address any issues that may come up.
The buyer is protected from debt-ridden stocks.
In a stock sale, due diligence eventually benefits the seller because the buyer will only assume any legal or financial liabilities when pleased with your business's overall legal and financial health.

Conclusion

Deciding between an asset sale or a stock sale is now easy. An asset is ideal if you want more demand and a higher sale price, while a stock sale is ideal if you want to sell sooner and at favorable tax terms.

At Exitwise, we help you hire the best accountants, business brokers, corporate attorneys, and other M&A experts who can guide you on a better deal structure.

Reach out to us today to speak to one of our experts and get started right away!