Deal Structure: Asset Sale

If you are contemplating selling your business, one of the most important considerations is whether to structure the sale as a stock or asset deal.  Most public company acquisitions are on a stock basis.  However, privately held company transactions can be either stock or assets sales.  Deal structure can be highly important as the advantages for one side can create disadvantages for the other side. 

Generally, a seller typically favors a stock deal and a buyer typically favors an asset deal.  All transactions are different, so facts and circumstances should be analyzed fully with tax and legal counsel.  Here are some advantages and disadvantages to a buyer and seller in an asset sale. 

Buyer Advantages:

·         Tax basis of assets acquired is fair market value. 

·         Price paid is deducted, amortized, or depreciated. 

·         Buyer can choose the business structure or form.

·         Selected assets are bought and liabilities assumed. 

·         More debt and equity structuring flexibility.

·         Less exposure to contingent liabilities. 

Buyer Disadvantages:

·         Buyer usually can’t use seller’s tax accounting methods – problem if assets on books are worth more than fair market value.

·         The Buyer may desire to keep certain contract rights.

·         May get a step-down in basis if there is bargain purchase.

·         C and reorganizations may limit basis step-up.

·         Built-in capital gains tax for certain S-corporations.

Seller Advantages:

·         Less warranty exposure obligation to the buyer. 

·         If no built-in capital gains tax, the buyer gets more flexibility often with little cost to the seller. 

·         Easier to retain selected or non-operating assets. 

·         Seller may keep some tangible or intangible assets.

·         Gives the buyer greater flexibility in structuring the transaction.  

Seller Disadvantages:

·         C corporation or recently converted S corporation and double taxation.   

·         If the company is a C or S corporation with built-in capital gains tax exposure, can be double tax cuts for seller.

·         Buyer may underpay for unwanted assets.

Contract rights may not be easily transferred.