When purchasing or selling a business, one of the initial questions is whether the buyer is acquiring the company’s stock or its assets. This article provides a brief overview of a stock sale and some considerations when determining which purchase and sale method to use.
In a stock sale, a buyer acquires all the selling stockholders’ stock, giving them direct ownership of the seller’s company. Though assets and liabilities must be accounted for just as in an asset sale, stock sales do not require the company to convey each individual asset separately, because the title to each asset remains with the company being sold.
Stock sales are generally less desirable from the purchaser’s viewpoint because they can result in a loss of ability to gain a stepped-up tax basis in the assets being sold; they prevent re-depreciation (meaning higher taxes for the purchaser). Stock sales are also less desirable due to the risk of assumed company liabilities, including all contingent risks (known, unknown, or undisclosed), e.g., OSHA violations, environmental concerns, employee issues, and future lawsuits.
Despite these concerns, certain risks can be mitigated by a properly drafted purchase agreement. If the selling entity has assets or contractual rights and obligations that are otherwise difficult or cumbersome to assign, a stock sale may be the preferable sale method.
From the seller’s viewpoint, stock sales tend to be preferred, as the proceeds of sale are taxed at a lower capital gains rate, which can bypass corporation/c-corporation level taxes. As noted above, the purchaser may be responsible for future liabilities, thereby relieving the seller of those concerns.
The choice of how to purchase or sell an entity is an important consideration. There are risks and benefits to a stock purchase, depending on the circumstances, which must be carefully evaluated to prevent unexpected results.
Contact a Paule, Camazine, and Blumenthal attorney if you are looking for help in purchasing or selling a business.
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