Asset Sale vs. Stock Sale

When a startup company wants to sell all or part of their business, they can do so in more than one way. Asset sales and stock sales are two of the most commonly accepted mechanisms of selling the startup.

It might appear to be a frivolous decision that may have no bearing on the future of the firm.

However, this is not the case, an asset sale or a stock sale can have a significant impact on the transaction and who benefits from it.

In this article, we will have a closer look at the concept of asset sale vs. stock sales and how they impact the transaction.

Difference between an Asset Sale and a Stock Sale

In the case of registered companies, the equity shareholders of the company have title to all its assets and liabilities.

Hence, if investors want to buy a company, they can either do so by acquiring the equity shares or they can choose to buy the assets.

If the investors choose to buy the equity shares of the company, then they assume the assets as well as liabilities of the firm.

Hence, if the firm has close to zero liabilities, then it should not technically make much of a difference.

However, as we will see below, buying the equity shares of the company or the asset base of the company can have a huge impact on various factors related to the transaction

Impact of Choosing Between Asset Sale and Stock Sale

  1. Taxation: The choice between an asset sale and a stock sale can become quite complicated when the impact of taxation is taken into account.

    For instance, if a firm sells its assets, then it will receive consideration from them in the form of cash. If the sale price of assets is higher than the purchase price, then the difference will be treated as profit from business and will be taxed at the prevailing rate for corporate income.

    Since the income tax rate can be quite high, it can lead to a significant tax liability for the selling company. Also, since the company is likely to be closed after the sale, the proceeds of the asset sale need to be distributed in the form of dividends.

    It is highly likely that the selling company will have to distribute the proceeds in the form of dividends. Here too, the selling company will have to pay dividend distribution tax.

    Hence, in the event of an asset sale, the selling company is subject to double taxation.

    On the other hand, the buying company can show the assets being acquired at a higher price as assets on their balance sheet.

    They can then charge annual depreciation on these assets. This annual depreciation charge can be used to reduce the taxable income of the buyers for many years.

  2. Protection from Liabilities: It is a known fact that smaller startup firms do not have very high reporting standards. It is quite likely that off-the-book liabilities such as potential lawsuits have not been informed to the buyer.

    In such cases, if the buyer buys the firm, they are responsible for the liabilities of the firm as well.

    However, if they buy only the assets, then they are not a party to the previous liabilities of the firm that they have purchased.

    Hence, investors may prefer to use the asset sale method since it minimizes their potential liability.

  3. Transaction Costs: The transaction costs related to asset sales can be much higher.

    This is because for the asset sale to take place, the buyer will have to appoint an appraiser who will have to submit a report about the market value and present condition of each of these assets.

    The buyer will then have to create several different types of paperwork to record the transfer of an asset from the seller. Also, the buyer may have to pay different types of transaction charges.

    For instance, if the asset being acquired is land, stamp duty may be applicable. These transaction costs are likely to be at a higher rate as compared to stocks.

    When a stock sale is completed, there is very little money to be paid in the form of transaction costs and also the transaction costs are very low. Hence, a stock sale can be considered to be the more efficient method to transfer business assets.

Relative Bargaining Power

From the above points, it’s quite clear that the asset sale method is likely to be preferred by buyers. This is because they can push a lot of the costs to the sellers and get a better price for themselves.

On the other hand, the stock sale method is preferable to the seller since they will be able to obtain more value for their money.

Hence, the question of asset sale vs. stock sale ultimately boils down to be a question of who has more bargaining power. If the seller has many options, then the buyer will have to agree to a stock sale in order to woo the seller.

On the other hand, if the seller has no options, then they will have to accept whatever deal is being provided to them.

The bottom line is that the decision to sell the company via an asset sale or via stock sale can be a strategic decision since it can have a long-term impact on both parties.

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