What is an Asset Sale?
When selling or buying a business / company, the transaction may have many elements. One basic element is whether the transaction will be structured as an Asset Sale or an Entity Sale. The trick here is that one deal structure typically benefits one party and not the other. To accommodate both parties sometimes a hybrid version of both deal structures are utilized. Today I will focus on the Asset Sale.
An Asset Sale allows the seller to sell his tangible and intangible assets to a buyer directly. In an Asset Sale, the seller retains ownership of the company’s shares of stock (for corporations) and only the identified assets in the Asset Purchase Agreement are sold and transferred to the buyer. The buyer creates a new entity or uses an existing entity for the transaction.
In a traditional Asset Sale, the buyer receives inventory, furniture, fixtures, equipment, vehicles, machinery, tools etc., trade and domain names, telephone and fax numbers, e-mail addresses, websites, assignable leases, goodwill and all intangible assets. The seller retains all funds in their cash accounts, accounts receivable, prepaid expenses, deposits, and other current assets. The seller will also be responsible for the payoff of all liabilities, accounts payable, payroll taxes due, and all other debt. The seller will receive the purchase price proceeds plus or minus the net effect of the assets or liabilities retained as above.
When comparing the effects of an Asset Sale versus the Entity Sale, a buyer will generally prefer the Asset Sale for several reasons. The buyer will be able to clearly identify the assets and liabilities (if any) they will receive. A buyer may also benefit from a write up of the basis of assets to the fair market value paid for them. This results in increased tax depreciation write-offs leading to lower taxable income and lower taxes for the buyer in the future.
Sellers usually prefer an Entity Sale for several reasons. First, they are generally completely free from all future business/company obligations. The buyer purchases stock and all assets, liabilities, etc. of the predecessor company. Secondly, the seller may be able to pay lower taxes via capital gain rates. The seller, if a C Corporation may face double taxation, at the corporate and personal level with an Asset Sale.
Deal structures and taxation are key components of any business sale. This is the time when experienced business transaction professionals will assist you. As we all know, “it’s not how much you get, but how much you keep!”
What is an Entity Sale?
Now we will discuss the Entity Sale, and for simplicity, I will focus on companies with a corporation structure and the sale of stock. On the surface, a stock sale is a relatively simple transaction with a Buyer purchasing the stock certificates of the Seller for an agreed upon purchase price.
Deal structures, taxation, organizational integration, legal areas are all key components of a business sale transaction. Sellers will generally prefer a stock purchase, because it allows them to completely step away from the business. By all practical matters the Buyer in effect steps into the role of the Seller and the operation of the business continues in an uninterrupted manner. Unless specifically agreed to, the Seller has no continuing interest or obligation with respect to the assets, liabilities, or operations of the company.
When an acquirer purchases the stock of a corporation, the company in its’ entirety is transferred. In a negotiated purchase price all the balance sheet items – assets, liabilities, and stockholders’ equity transfer at book value to the purchaser. When a C Corporation is sold in a stock sale, the proceeds transfer directly to the individual selling the stock and results in taxation at the lower capital gain level for the individual. This is important, because as we discussed last month, an Asset Sale could result in double taxation for the corporation and seller.
The Buyer usually prefers an asset purchase as they will be able to clearly identify which assets and liabilities will be assumed. The “fear of the unknown” for liabilities, along with the ability to buy assets at fair market values and depreciate accordingly for future tax savings usually favors the asset sale for the Buyer. A similar step up basis for assets may be available for a stock sale.
Often times, there are unique transactional reasons supporting a stock sale, such as if the selling company has non-assignable contracts, a large fleet of vehicles to be transferred, licenses and permits which are non-transferable, etc.
As you can see, the decision on whether to structure a transaction as a Stock Purchase or an Asset Purchase involves many factors which can impact the Seller and Buyer differently. Once again this is a time to employ experienced professionals for sound advice which will lead to a successful transaction for both parties.
PUBLISHED IN THE SOUTHCOAST BUSINESS BULLETIN ON FEBRUARY 22, 2013