As a commercial broker, representing buyers or sellers, I am often asked about the different aspects of selling assets and selling shares. There are advantages and disadvantages for both the buyer and the seller with each type of sale. Please note that each business transaction is unique, so the information here is presented in very general terms.
DESCRIPTION
Sale of assets:
An asset sale is when an individual or a corporation purchases the assets, both tangible and intangible, of a sole proprietor or a corporation. IE Abc, Inc. purchases all assets of Xyz, Inc.
This typically consists of any or all furnishings, fixtures, equipment, leases, lease improvements, rights, registrations (i.e., customer lists), licences, franchises, goodwill, non-compete covenants, trade secrets, trade names , phone numbers, supplies, on-site labor, work in progress, and inventory.
This does not include: cash, accounts receivable or accounts payable. Xyz, Inc. still needs to meet the debt obligations of Xyz, Inc.
Sale of stock:
A stock sale is the purchase of corporate shares or LLC shares from the owners. IE An individual or corporation buys all or a majority of Xyz, Inc. The buyer now owns Xyz. Inc.
A stock sale typically includes everything on the balance sheet: assets and liabilities. Loans to the owner and personal liabilities are normally eliminated.
When a small or medium privately owned company is sold, one of the main reasons stock sales take place is when there is some kind of right, license, exclusive distribution that cannot be easily transferred. Most business sales are asset sales.
RULES GOVERNING THE SALE OF SHARES
When a stock sale takes place, there are regulations that must be followed so that the transaction does NOT fall under the auspices of the SEC, the Securities Exchange Commission. The main guidelines are:
1. The business must be sold as a continuing business. I can’t be a shell.
2. Businesses may not be advertised as stock sales.
3. Generally, 100% of the shares must be sold OR 51% or more of the shares can be sold and the seller keeps the balance. The seller may sell the balance in the future as part of a structured sale.
4. The buyer must operate the after-sales business.
5. In California, the buyer and seller must live in California.
ADVANTAGES AND DISADVANTAGES FOR THE BUYER
For an asset sale:
advantage:
There is no liability for the corporation prior to ownership
No responsibilities for employees
Costs paid for assets are depreciable
Clean up credit, reputation, worker’s compensation, etc.
Disadvantages:
No established credit
Must rehire employees
Must negotiate a new lease
new licenses
A certain amount of operating capital is required; remember there are no accounts receivable.
Must comply with UCC-Bulk Sales. More time required to close and mandatory public notification
You must pay sales tax on furniture, fixtures, and equipment.
For a stock sale:
advantage:
Established Credit
Many times, no working capital is required
The lease is in place
Contracts are in place
Employees are in place – workers compensation established
No public notification
No sales tax
no deposits
ABSTRACT
Asset sales are…
easier to conclude
more favorable for the buyer and less favorable for the seller due to taxes
have much less responsibility to the buyer
preferred by buyers
Stock sales are…
More favorable for the seller and less favorable for the buyer due to taxes
have much more buyer responsibility
used when there are assets that are not easily transferred, i.e. an exclusive distribution
usually require a business attorney to draft the stock purchase agreement
preferred by vendors