Asset sale or stock sale, and why the two sides want different ones

What is an asset sale?

In an asset sale, the buyer purchases specific assets of the business and generally leaves the legal entity, and its liabilities, with the seller. You buy the equipment, the inventory, the customer list, the trade name, the goodwill. The seller keeps the corporation or LLC itself, along with whatever is attached to it. Most small business sales in the United States are structured this way.

What is a stock sale?

In a stock sale, the buyer purchases the ownership of the company itself, and everything the company owns and owes comes with it. The entity does not change, only who owns it. Every contract, licence, employee agreement and bank account stays exactly where it is, which is convenient. So does every liability, including ones nobody has discovered yet.

Why do buyers prefer asset sales?

Because unknown liabilities stay behind, and the tax treatment is better. Two reasons, and both are substantial:

• Liabilities generally do not transfer, so a lawsuit filed two years from now about something that happened before you bought is the seller's problem
• The purchase price is allocated across assets and much of it can be depreciated or amortised, which reduces your taxable income for years afterwards

Why do sellers prefer stock sales?

Because the tax bill is usually lower and the liabilities go away with the business. A stock sale is typically taxed as a single capital gain. An asset sale splits the price across asset classes, and some of those classes are taxed as ordinary income at a higher rate, which can leave a seller with meaningfully less after tax on the same headline price. That gap is why structure gets negotiated rather than assumed.

How does purchase price allocation work?

In an asset sale, both sides must agree how the price is split across categories of asset, and they file that split with the IRS. The allocation is a genuine negotiation because it moves money. Value assigned to equipment can be depreciated quickly by the buyer but may trigger recapture income for the seller. Value assigned to goodwill is amortised by the buyer over fifteen years and is usually capital gain to the seller. Agree the allocation before closing, in writing, because both parties have to report the same numbers.

What does not transfer in an asset sale?

Anything with someone else's signature on it, unless that someone agrees. This is the practical cost of the structure buyers prefer, and it is where deals get delayed:

• The lease, which usually needs the landlord's written consent to assign
• Customer or supplier contracts containing a change-of-control or anti-assignment clause
• Licences and permits, many of which must be applied for fresh in the new entity
• Employees, who are technically terminated by the seller and rehired by the buyer

Which structure should you use?

Start from an asset sale unless something specific makes it impossible, then price the difference. Where a business depends on a licence or a contract that cannot be reassigned, a stock sale may be the only workable route, and then the buyer's protection has to come from indemnities and escrow holdbacks in the purchase agreement instead. When the seller's after-tax outcome is genuinely worse under an asset sale, that difference is negotiable like anything else. Bring a tax advisor in before you agree a structure, not after.