Business Sale; Advantages and Disadvantages Between Selling Stock and Selling Assets
Selling a business (or buying a business) can be a stressful and exciting process at the same time. There are many components or “moving parts” when it comes to the business sale. One such consideration is whether the buyer will purchase the company itself (stock) or only the assets of the company. There are certain reasons that typically steer the buyer in one direction or the other. Some of these reasons are discussed in this blog, below.
Business Sale Considerations
The first detail a buyer needs to learn about a prospective business they are intending to purchase is the tax status of the business. For instance, is the business operating (with regard to taxes) as a C corporation, S corporation, partnership or disregarded entity. Next, the buyer should determine the legal status of the business. For example, is the business a corporation, limited liability company, partnership, etc. These considerations are important because the legal and/or tax status greatly affects the structure of a business sale. Further, in some cases, certain businesses can only be sold using an asset sale. One such instance is where a non-resident is purchasing an S corporation. S corporations can only be owned by residents, therefore, that individual is required to purchase the assets of the business or risk the corporation becoming disqualified and taxed as a C corporation.
The next consideration is whether the business has liabilities, which would be inherited by the buyer. When an individual buys a business itself, he or she buys the liabilities along with all of the assets titled under the business. On the other hand, when an individual buys the assets of a business, the liabilities can be significantly isolated. Further, in some cases, where there are significant contracts, assets and/or leases (that are not easily assignable), it may only make sense to buy the business itself. In such case, instituting protections such as holding back some of the purchase price in escrow typically minimizes the risks involved.
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