Asset Sale vs Stock Sale



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A business owner may decide one day that they want to sell their business. The two most common ways to sell a business are either through an asset sale or a stock sale. The type of sale that is used depends on a variety of factors such as what type of business entity the company is, how many assets it has, and how many liabilities it has. Sellers and buyers each have their own preferences when it comes to the type of sales transaction they want to take on. But before you decide which sale to conduct as a seller, you need to understand the difference between an asset sale and a stock sale.

Asset sale

The owners of small businesses and other privately held companies will typically use asset sales when selling their businesses. Since private companies don’t offer public stock options, the only true value they possess is through their capital assets. Now it is possible for an owner to sell the actual entity of their private company to a buyer, but it is very rare. If the seller owns an unincorporated proprietorship, then an asset sale is guaranteed because no entity exists. If the seller owns a partnership or limited liability company, ownership interests could technically be sold but it depends on what kind of entity the owner set it up as. For example, if the owner of a limited liability company set up their business as a disregarded entity for tax purposes, then it is not an entity that can be transferred to someone else. It would basically be treated just like a sole proprietorship would be treated. Therefore, you would only be able to sell the company’s assets in this case.

The only advantage a seller has with an asset sale is being able to make quick cash on the capital assets of their business that they no longer need. If you own a failing company or one that you know is about to go under, you’ll want to liquidate all the assets of that company or else they’re likely going to be thrown away or locked into storage. This money at least gives you a chance to pay back some of the liabilities and debts that you’ve accumulated from running your business. Remember, sellers will usually keep the liabilities of their business after an asset sale. That is why buyers love asset sales so much because it gives them a chance to attain a company’s assets without having to take on any of their liabilities. Plus, buyers are likely purchasing these assets at a cheaper price than what the seller originally paid for them. This gives buyers the chance to either purchase cheaper assets for their own business or resell the assets they just purchased for more money and make a profit off them.

Sellers, on the other hand, despise asset sales because they are usually losing money on the investment they made in purchasing their assets. However, it is better for sellers to get a little of their money back than no money at all. And since they don’t have the option to sell stock in their private company, sellers really have no choice but to use asset sales when they want to sell their business. But, in the rare cases where sellers are actually making a profit off their assets sale, they’ll be subjected to a high capital gains tax rate on those profits.

Tax consequences 

The current federal capital gains tax rate is somewhere around 20%, which is a lot for most small businesses to pay on the proceeds of their assets sales. There could also be city, county, and state capital gains taxes as well. To make matters worse, a business owner who sells the assets of their C-corporation will have to face double taxation. This means they’ll have to pay personal income taxes on the profits as well as commercial income taxes for their company. As a result, sellers are still going to lose in the end whether they sell their assets for a profit or not.

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Stock sale

The owner of a company that’s incorporated will almost always use a stock sale when selling their business to a buyer. Stock sales are only available to companies that are incorporated, which are typically C corporations or Subchapter S corporations. This type of sale allows the seller to actually transfer ownership interest in their company over to the buyer instead of just selling the company’s assets to them. However, the buyer will end up taking ownership of the assets anyway after they become the owner of the company since the company owns the assets. The only catch here is the buyer will also be taking on the liabilities of the company as well. This is the part that often turns buyers off because they just want the assets and not the liabilities. But if the buyer thinks they can profit in the long run from purchasing ownership of the company, then they’ll be willing to take on the liabilities if they truly believe the profit potential outweighs the expenses and debts.

So, why would a seller want to sell stock in their company if their business is successfully making money? The reason for this is simple. If a publicly traded company is doing financially well, that means the stock value of the company is increasing. If the stock value increases, that means the value of the company increases. At some point, the seller may just decide that they want to cash out by selling all their shares of the company and just retire. Either that or they may want to start another business with the money they get from the stock sale. And if that’s not beneficial enough for the seller, they also won’t have to pay a high capital gains tax when they sell their stock like they would if they sold their assets. Therefore, stock sales are truly the best option for sellers who want to cash out of their company and not have to take any of the liabilities or other ownership obligations with them.

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Video: Bill Whitehurst, president of Whitehurst Mergers & Acquisitions, gives insight into some of the considerations a business owner needs to make when selling assets vs stock. This is not a tax, financial or legal advice but simply an overview to give business owners an overview to the topic.

Final Words

It is always a good idea to seek the advice of a tax lawyer or financial adviser before deciding which type of sale to make with your business. Making the wrong choice could cost you more money than you’d have to pay if you made the right choice.


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