If you are contemplating selling your company, you may have heard the terms asset sale or stock sale. We’ll discuss the nature of each type of sale and describe when a deal might lead to a stock sale versus an asset sale. First, we’ll discuss an asset sale because that is the most common form for buying and selling a company.
When you sell your company to another party in most cases, they will not be buying your actual corporation. Usually what they will do is form their own corporation, and all of the assets of your company will be transferred to the new buyer’s company. So if the company is named Smith Construction Company, Inc., the buyer will buy the rights to doing business as Smith Construction Company. Their company could be called anything they want, but typically they will want to do business as Smith Construction Company. Part of what they are buying is the brand name of what you created.
Since they aren’t buying the corporation, they will need to have new employment agreements with all of the employees with their new corporation. They will also need to transfer all of the contracts with suppliers and anyone they have lease agreements with.
So, it’s a reasonable question to ask, why not just purchase the corporation rather than go through all of the trouble to make all of these transfers. It can be a lot of paperwork and legal fees depending upon how many agreements there are. In some cases, the corporate stock is purchased to avoid these issue, but usually, the buyer’s attorney wants to have the deal done as an asset purchase because, with an asset purchase, the buyer will not be responsible for any unknown lawsuits or liabilities which may have been associated with the previous company. Any liabilities related to the old company will stay with the owner of that company, even if the company is shut down after the sale is completed.
With an asset sale, the buyer gets a clean slate with a fresh start and a new company, even if they are using the old companies name. The clean slate also usually applies to the standard ongoing assets and liabilities such as accounts payable and accounts receivables. In a typical asset sale, the buyer will have no responsibility for accounts payables or any debt, since they are just acquiring the assets of the company.
Most companies have many accounts payables that are ongoing such as supplier payments, payroll, and rent so usually adjustments will need to be done at the closing to take into account that some payments have been prepaid before the closing and some payments are outstanding at the closing. For example, if the rent is $10,000/month and the closing is in the middle of the month, and the seller has already paid for the whole month the buyer will owe the seller an additional $5,000 for the payment of half of the month. These types of prorated adjustments will need to be made for all of the various bills that have either been partially prepaid or not paid yet. Usually, the attorney’s take care of these adjustments at the closing. If you need an experienced attorney that is familiar with this process, we have some that we can recommend.
In many cases with an asset sale, the buyer will not be entitled to the accounts receivable for work that was done before the closing and has not been paid yet. In some cases, the buyer will negotiate to include the accounts receivables in the purchase price of the company. They will typically make the point that if the accounts receivables are not included, then they will need working capital to get cash flow from day one unless it is the type of business where customers pay very quickly. Whether or not accounts receivables are included in the purchase of the company is sometimes negotiable. Offers would need to be evaluated not just on price but what isn’t and is included in the sale such as accounts receivables and payables as well as the structure of the transaction.
Assets that are typically included in the purchase price are furniture, equipment, vehicles, etc. Inventory is usually included but sometimes is broken out separately and paid for based on the actual cost of the inventory at the closing. If the company has a lot of inventory then, usually a physical check of the amount of inventory is often done either the day of the closing or just before the closing.
There are also tax implications depending on whether the sale is structured as an asset sale vs. stock sale. Typically a stock sale is more favorable for the seller, and an asset sale can be more advantageous for the buyer. This is particularly the case when the company being acquired is a C corporation in which case business seller prefer the sale to be structured as a stock sale.
We’ve covered some of the characteristics of an asset sale which is the most common form of a sale of a company. However, stock sales do often happen for several different reasons. In some cases, a business sale transaction starts out as an asset sale and then changes to a stock sale.
This happened with one of our clients when we were selling their software company. In this case, the seller’s corporation had license agreements with all of their ongoing clients who would have necessitated the new owner of the company to get each client’s approval before the transfer of each license. This wasn’t practical and could cause the loss of customers so both buyer and seller agreed that the best thing was to have the buyer purchase the stock of the company, which would mean there would be no approval necessary to transfer the license agreements because the new buyer would own the corporation when the business was transferred. And all of the license agreements were with that corporation.
In the case of a stock sale, the buyer’s attorney will usually insist that the seller will provide indemnifications for any lawsuits or liabilities that arise from the time that the seller owned the business. Also, the seller will not be paid all of the funds right at the closing to make sure that no hidden liabilities arise for a period after the closing.
Other cases where a stock sale sometimes takes place is where the landlord will not transfer the lease to a new buyer. When the lease is made with the seller’s corporation then typically no landlord consent is necessary, so in this case, a stock sale will preclude the necessity of getting landlord approval.
Another situation that can call for a stock sale is where the company has agreements with a lot of suppliers that would need consent if there is a new corporation. If the buyer takes over the stock then typically supplier consent is not necessary.
We’ve outlined some of the scenarios for assets sales vs. stock sales, and we’ll cover some more issues in the next section of the article.
Stock Sale vs. Asset Sale
What is the difference in what is transferred in a stock sale vs asset sale? Generally, in a stock sale, the purchaser gets both the accounts receivables and is responsible for short term debt, which is standard accounts payable of the business such as payroll, rent, bills, leases, etc. If there is a long term debt such as a mortgage or loan from a partner, the seller usually needs to pay this off, or there would be an adjustment to the purchase price to compensate the buyer for assuming a long term debt.
As far as what is included in a stock sale vs an asset sale, we’ve outlined some of what is customary however things are negotiable, so it depends on what the price of the company is versus what is included in the sale. Our job as M&A Brokers is to get as many qualified potential buyers as possible. This will help us to negotiate the best price and terms that we can. And together we will find out what the best offers are including price, what is included in the offer, and the structure of the stock sale or asset sale. We’ll help you to understand the differences between the offers and try to negotiate and improve the details of the offer.
If our client has a C Corporation or there is difficulty in transferring contracts, then we will often stress to potential buyers that our client would prefer a stock sale. Buyers that are more likely to go for a stock sale are public companies that are already own a C Corporation and will merge your corporation with theirs, or buyers that are more likely to want to hold on to the company for a very long time. These buyers won’t have the issue of reselling a C corporation in the foreseeable future.
Confidential Consultation with Synergy Business Brokers
It helps to have an experienced M&A Broker on your side when navigating the complexities and decisions of the sale of your company. Synergy Business Brokers has been selling companies since 2002. We specialize in selling companies with annual revenues of $700,000 to $40 Million in construction, manufacturing, healthcare, software, distribution, services, contractors, technology, engineering, transportation, consulting, and environmentally friendly companies.
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