Asset Purchase vs. Stock Purchase: Which Is the Best Way To Sell Your Company?

In Business Transactions by Jake GoldsmithLeave a Comment

An asset purchase and a stock purchase can both be good ways of selling a company, but there are a lot of factors to consider. In fact, depending on what kind of business entity you have, the choice may already be made for you. Let’s start by looking at some aspects of the two methods, then we’ll talk a little about which is better.

What is an Asset Purchase?

An asset purchase involves the sale not of the actual company, but of everything the company owns. Now this doesn’t just mean the equipment, inventory, and other tangible property of the company, although that is typically included. An asset purchase also includes the intangibles owned by the company, usually including the company’s name, any trademarks the company owns, trade secrets, goodwill of the company, and other intangibles. Keep in mind here that if any of the assets are leveraged, you will have to make sure that your contracts allow for transfer. If they don’t the contracts will have to be renegotiated before you can sell the assets. This can also be an issue for non-assignable licenses or other contracts of the company.

Understand that once the company’s assets are sold, you still own the company. This means you are still responsible for any reporting requirements to the state such as annual reports. To avoid this, you would typically just dissolve the company once the assets are sold. However, you have to be careful because if the company has any liabilities, dissolution may either not be a good option, or not be an option at all.

What is a Stock Purchase?

A stock purchase is the process of actually selling the company itself. Basically, this is done by selling all of the stock (or membership interests if it’s an LLC) in the company. Notably, this means that there must be a separate legal entity to sell. Therefore, a stock purchase is an option if we’re talking about a corporation or LLC, but not if we’re dealing with a sole proprietorship or a partnership. One of the big advantages to a stock purchase for you as the seller, is that when you sell the company you are also selling the liabilities of the company. This means that any debts of the company are now the buyer’s problem. Also, there is no need to renegotiate the company’s contracts because they pass along with the company. Usually, as long as the company is listed as the party to the agreement, the agreement will remain unchanged after the sale. The exception to this would be contracts that contain provisions for termination or modification in the event of a change of ownership.

Depending on the size and character of the company, a stock purchase can implicate securities laws. This can greatly complicate the process and if the securities laws are not complied with, it can lead to some serious headaches for both you and the buyer, down the road. 

Which is better? Stock or Asset Purchase?

This isn’t really a question that can be answered without A LOT more information. In most cases, a stock purchase is more favorable to the seller, but that’s not always the case. One big upside for the seller is that you are no longer on the hook for the liabilities of the company. However, if you signed as a personal guarantor of any of the liabilities, you are still bound to that. Also, like I mentioned before, if you have a sole proprietorship you can’t do a stock purchase.

Hopefully, you now have a basic idea of the differences between an asset purchase and a stock purchase, but this is just a very limited overview and doesn’t address a lot of the nuance. Hopefully you see that this is not a decision you should make alone. Your attorney can give you a better idea of which method best suits your particular circumstances. It is also important to include a CPA or tax attorney in your decision, because there can be significant tax implications with either choice.

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