In most cases, the sale of a company’s ownership interest can occur in one of two ways: a stock sale, or an asset sale. While there are many considerations, they key differences often come down to tax implications and potential liabilities.
During my time as a business broker, I dealt with asset sales 99% of the time, and it is likely the best sale structure for a business with a valuation less than $1,000,000.
Let’s talk about the high-level differences between both structures:
Stock Sale
A stock sales transfers ownership of the business entity (such as your LLC) to the buyer. This ownership includes all assets (inventory, FF&E, goodwill, etc.) and liabilities (debt, legal judgements, etc.).
Liabilities are often the biggest factor in this type of sale. Future liabilities of the business will fall under the responsibility of the new owner. This is where a buyer must be cautious. If the actions of a business could expose it to liability in the future, a stock buyer could be on the hook for this.
However, if the business has copyrights or patents that are difficult to assign, a stock sale may be the best option for a buyer. Same thing goes for a dependence on few or large vendors/customers – a stock sale mitigates the risk of losing these contracts.
Asset Sale
An asset sale, the buyer purchases all (or some) of the assets of the business, potentially all (or some, or none) of the liabilities, and transfers the interest into a new business entity belonging to the buyer. This means the selling business entity is left behind entirely.
An asset sales requires a slightly more detailed agreement, as the assets and liabilities being transferred/assumed must be clearly stated and described. This is where hangups can occur – if assets are difficult to transfer due to issues of assignability, ownership, or consents, an asset sale may be challenging.
However, an asset sales can shield a buyer from potential future liability, or when the business doesn’t have the ownership records/history to confirm a stock sale.
Bonus Question: What about working capital in an Asset Sale?
In an asset sale, net working capital is typically included in a sale. This number includes accounts receivables, inventory, prepaid expenses, accounts payable, and accrued expenses.
In conclusion, each situation may vary. You should always ask your CPA on taxation implications and your business attorney about liability concerns.
Best of luck!
