THE DIFFERENCE BETWEEN ASSET SALE AND STOCK SALE ?


THE DIFFERENCE BETWEEN ASSET SALE AND STOCK SALE ? 



Deciding whether to sell a business as an asset sale or a stock sale is complicated because the parties involved benefit from the opposing structure.



Generally, buyers prefer asset sales and sellers prefer to sell stocks.



This article highlights some key differences between the two structures.
This article is not intended to provide legal and / or tax advice.


All business transactions are unique, and buyers and sellers should always consult appropriate professionals (stakeholders and accountants) when considering the business sales structure.


The sale of assets is to buy individual assets and liabilities, and the sale of shares is to purchase the company's ownership shares.

There are many considerations when negotiating the type of transaction, but the tax implications and potential debt are the main concerns.


If the problematic business is a sole proprietorship, affiliate, or LLC, then none of these corporate structures can be structured into a stock sale because it is out of stock.


Instead, these types of owners can sell their partnerships or members' equity rather than the entity that sells them.


If the business is integrated as a general C or a sub-S, the buyer and the seller must decide whether to structure the transaction as an asset sale or an equity sale.




THE DIFFERENCE BETWEEN ASSET SALE AND STOCK SALE ?
THE DIFFERENCE BETWEEN ASSET SALE AND STOCK SALE ? 


ASSET SALE



In the sale of assets, the seller has a legal entity and the purchaser purchases the company's individual assets, such as equipment, fixtures, leases, licenses, goodwill, trade secrets, trade names, telephone numbers and inventory.


Asset sales generally do not include cash, and sellers generally have a long-term liability obligation.
This is usually called cashless debt transaction. Generalised net working capital is also generally included in sales.

Net working capital often includes receivables, inventories, prepaid expenses, accounts payable and expenses incurred.

BUYER'S PERSPECTIVE


Asset sales in the IRS Guidelines allow buyers to "step through" the depreciable criteria in the company's assets.
Buyers can gain additional tax benefits by assigning higher value to rapidly depreciating assets (typically 3-7 years of life) and by assigning lower values ​​to assets that are slowly depreciated (such as a 15-year goodwill period) .

This reduces taxes faster and improves the company's cash flow during important first years.


Buyers also prefer to sell assets because they more easily avoid inheriting contingent liabilities in the form of potential liabilities, particularly product liability, contractual disputes, product warranty issues, or employee suits.

But buying assets can also cause problems for buyers. Certain assets are more difficult to transfer due to assignability, legal ownership, and third-party consent issues.


More difficult examples of transferring assets include certain intellectual property, contracts, leases, and permits.

If you obtain a consent form and use the remapping permission application, the transaction process may be slower.


SELLER'S PERSPECTIVE


In the case of sellers, intangible assets such as goodwill are taxed as a transfer gain, while other "hard" assets are subject to higher normal income tax rates, resulting in higher taxes due to asset sales.

The federal capital gain rate is now 20% and the main interest rate varies (6% for US repairs and 6.45% for Kansas). The usual rate of income tax depends on the seller's tax hierarchy.


Moreover, if the company to be sold is a C company, the seller will face double taxation.
The company first imposes a tax on selling the assets to the buyer. Then the company owner is taxed again when the proceeds are transferred outside the company.


Also, if S SIGO, formerly C Company, and the sale is within the 10-year internal earnings (BIG) tax recognition period, the sale of S's assets under IRS 1374 may result in corporate-level BIG taxes.






THE DIFFERENCE BETWEEN ASSET SALE AND STOCK SALE ?
THE DIFFERENCE BETWEEN ASSET SALE AND STOCK SALE ? SALE OF SHARES (BUY / SELL)





Through the sale of shares, the buyer acquires ownership of the legal entity of the seller by purchasing shares directly from the seller.

Actual assets and liabilities acquired from stock sale tend to be similar to asset sales.
Assets and liabilities that the buyer does not want are distributed or repaid before the sale.


Unlike the sale of assets, the sale of shares does not require a large number of separate shipment of individual assets because each asset is titled within the enterprise.


BUYER'S PERSPECTIVE


The sale of shares will result in the buyer losing the ability to attain a higher standard of value and thus not be able to devalue certain assets again.

The asset at the time of sale, ie the carrying amount, sets the depreciation criteria for the new owner.
Therefore, if the depreciation cost is lowered, the future tax on the buyer can be higher than the asset sale.

Buyers can also take more risks, including all contingent risks that are unknown or not disclosed, by buying shares of the company.

Future litigation, environmental concerns, OSHA violations, employee issues, and other responsibilities are the responsibility of the new owner. These potential liabilities can be mitigated through representation, warranties and reimbursements in the stock purchase agreement.

If the business in question has a large number of copyrights or patents, or if government or business contracts are difficult to allocate, it may be a better choice to sell stocks because the entity, not the owner, retains ownership.

Also, if a company relies on several large suppliers or customers, the risk of loss of these contracts due to the sale of stocks may be reduced.


SELLER'S PERSPECTIVE


Sellers often prefer to sell stocks because all proceeds are taxed at a lower capital gain rate, and Company C bypasses corporate-level taxes.

Likewise, sellers are less liable for future liabilities such as product liability claims, contract claims, employee litigation, pensions and salary plans.

However, the purchase contract of the transaction can return the responsibility to the seller.
The transaction structure of all transactions can have a significant impact on both the buyer and seller in the future.

Many other factors, such as the company's structure and industry, can also influence decisions.

It is important for the parties to initially consult with business brokers, legal counsel, and accounting professionals in the process to make sure that they are fully aware of the issues and are able to draw the desired results.


ASSET SALE TO STOCK SALE RATIO


What are the commonalities between the sale of assets and the sale of shares?
Analysis of market transactions in the Pratt's Stats database showed that about 30% of the total transactions were stock sales.


However, this figure varies greatly depending on the size of the company and the larger the deal, the more likely it is to sell the stock.



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