FAQs

What’s the difference between an asset sale and a stock sale?

The main difference between an asset sale and a stock sale is whether the buyer purchases the actual corporation or limited liability company, or just the business assets. In a stock sale, the buyer purchases the stock of the company (or membership interests of a limited liability company) that’s for sale. The business assets remain inside the company and are thus transferred to the buyer. In an asset sale, the seller maintains ownership of his or her company, but the business assets are transferred from that company to the buyer’s company.

Why do buyers tend to prefer structuring business purchases as asset sales?

There are two main reasons buyers tend to prefer asset sales. First, with an asset sale the buyer can purchase the business assets and leave the liabilities with the seller. That allows a buyer to avoid most of the pre-sale liabilities of the business. The other reason is that there are tax advantages to asset sales. When business assets are transferred in an asset sale, the buyer’s basis in the assets is the fair market value, which is almost always higher than the basis of the assets in the hands of the seller. Higher basis means less built-in gain to be taxed at a later date.

Why do sellers tend to prefer structuring business purchases as stock sales?

One reason sellers prefer stock sales is that the business’s liabilities are transferred to the buyer along with the assets. Although the seller might be responsible for some pre-sale liabilities under the stock purchase agreement, the seller is often less on the hook when a deal is structured as a stock sale. The other reason sellers prefer stock sales is that they tend to receive more favorable tax treatment in stock sales. First, their stock is usually a long-term capital asset, which is usually taxed at a lower rate than other types of income. Also, if the business they’re selling is a C-corporation, the proceeds of the sale will be subject to double taxation.

What types of liabilities do buyers need to watch out for in an asset sale?

The main type of liability buyers need to watch out for in an asset sale is liability in the form of taxes, as well as liens. If a company is behind on its tax obligations to the state when it sells its business, the buyer of the business will be on the hook for the taxes even if the transaction is structured as an asset sale. Also, if a company’s assets are subject to creditors’ liens, the liens will follow the assets when the business is sold. That’s why it’s important to make sure all taxes have been paid (as well as to follow the state’s “tax clearance” process, which shields the buyer from the seller’s tax liabilities) and to make sure the assets aren’t subject to liens.

What’s due diligence?

Due diligence is the process in which the buyer requests detailed information about the business from the seller. The purpose of due diligence is to confirm that the business is as it was represented by the seller to be.

What’s limited scope representation?

Limited-scope representation is when a lawyer and client agree that the lawyer will handle only a part of a project and the client will handle the rest. This is different from traditional arrangements, in which the lawyer handles all the legal issues from beginning to end. Limited-scope representation allows clients to save on fees because they are doing some of the work themselves.