Asset versus Stock sales

DESCRIPTION

Please note that this "Asset versus Stock sales" discussion is California specific, rules in other states may vary.

Asset Sale: An asset sale is when an individual or corporation buys the assets, both tangible and intangible from a sole proprietor or a corporation. IE Abc, Inc. buys all the assets of Xyz, inc.

This normally consists of any or all, furniture, fixtures, equipment, leaseholds, leasehold improvements, rights, records ( ie. customer lists ), licenses, franchises, goodwill, covenant not to compete, trade secrets, trade names, telephone numbers, supplies, workforce in place, work in progress and inventory.

This does not include : cash, accounts receivable or accounts payable. Xyz, Inc. still needs to fulfill Xyz, Inc.'s debt obligations.

Stock Sale: A stock sale is the purchasing of corporate stock or LLC shares from the owners. IE An individual(s) or corporation buy all the shares, or a majority from Xyz, Inc. The buyer now owns Xyz. Inc. A stock sale usually includes everything on the balance sheet - assets and liabilities. Loans to the owner and personal liabilities are normally removed.

When selling a small or medium sized privately owned business, a big reason stock sales take place is when there is some sort of right, license, exclusive distributorship that cannot be easily transferred. The majority of business sales are asset sales.

RULES GOVERNING STOCK SALES

When a stock sale takes place there are regulations that must be met in order for the transaction NOT to fall under the auspices of the SEC, the Securities Exchange Commission. The main guidelines are:

1. The business must be sold as an ongoing concern. I cannot be a shell.
2. Business's may not be advertised as stock sale.
3. Usually 100% of the stock must be sold OR 51% or more of the stock may be sold with the seller retaining the balance. The seller may sell the balance in the future as part of a structured sale.
4. The buyer must operate the business post-sale.
5. In California, the buyer and seller must live in California.

Asset versus Stock sales - for the Buyer

For an Asset Sale:

Advantages:

No liability for the corporation prior to ownership
No liabilities for employees
Costs paid for the assets are depreciable
Clean credit, reputation, worker's comp etc.

Disadvantages:

No established credit
Must re-hire employees
Must negotiate a new lease
New licenses
A certain amount of operating capital is required - remember no accounts receivable.
Must comply with the UCC-Bulk Sales. More time required to close and mandatory public notification
Must pay sales tax for furniture, fixtures and equipment.

For a Stock Sale:

Advantages:

Established credit
Many times, no operating capital is required
Lease are in place
Contracts are in place
Employees are in place - worker's comp established
No public notification
No sales tax
No deposits

Disadvantages:

Legal Liability for the corporation prior to change in ownership - this is the big one and usually the deal-breaker
Asset are normally already fully depreciated - tax implications
CPA's and attorneys usually advise against it

SUMMARY

Asset sales are...

easier to conclude
more favorable for the buyer and less favorable for the seller for taxes
have much less liability for the buyer
preferred by buyers

Stock Sales are...

More favorable for the seller and less favorable for the buyer for taxes
have much more buyer liability
used when there a assets that are not easily transferred, IE an exclusive distributorship
usually require a business attorney to draft the stock purchase agreement
preferred by sellers