Comparing and Contrasting Asset and Stock Deals
The merger and acquisition market is picking up along with the performance of the manufacturing sector. Today’s market is generally more seller-friendly than during the recession, when buyers were primarily trolling for distressed companies. Healthy, profitable companies can typically sell at higher pricing multiples today than five years ago, which means sellers don’t necessarily have to concede to their buyers’ every demand.
If you’re planning to buy or sell corporate assets or stock, you’ll need to negotiate more than just the selling price. How you structure the deal can have a major impact on how much cash and potential liabilities you’ll wind up with after the dust settles.
Asset vs. Stock Sales
A fundamental choice in a corporate deal is whether its stock or its assets will be sold. In a stock sale, all the outstanding shares of stock transfer to the buyer, and the business can continue to operate uninterrupted.
Asset sales are more complex. The buyer purchases all (or most) of the corporation’s assets and liabilities, renegotiates contracts and applies for new licenses, titles, and permits.
From a tax and liability perspective, sellers generally prefer a stock sale, while buyers typically prefer an asset sale.
A Seller’s Point Of View
With a stock sale, sellers pay tax on the difference between the selling price and their basis in the stock—and at the more favorable long-term capital gains rate as long as they’ve held the stock for more than 12 months.
But asset sales trigger double taxation for C corporations. The shell corporation—which the seller retains and winds down in an asset sale—pays tax on the gains from selling assets. And the shareholders pay tax on cash distributions.
Asset sales also can leave sellers vulnerable to future lawsuits, such as employee discrimination or intellectual property claims. Another consideration is depreciation recapture—it’s often overlooked even though it has the potential to significantly reduce the amount of cash taken away from the sale.
View from the Buy-Side
When buyers purchase stock, assets stay at book value and existing depreciation schedules apply. Although simpler to execute, stock sales typically result in higher taxable income for the buyer than do asset sales. With a stock sale, the buyer may be vulnerable to future lawsuits and other legal claims.
Asset sales enable the buyer to report assets, such as equipment and furniture, at fair market value. The value allocated to each fixed asset provides a fresh basis for depreciation, thereby lowering taxable income in the future. Under this arrangement, the buyer can avoid certain legal claims associated with the seller’s corporation.
Asset and stock sales aren’t something owners of manufacturing and distribution companies handle on a daily basis. When you decide to buy or sell, it’s critical to structure the deal in the most advantageous way possible from both legal and financial perspectives. Attorneys and CPAs for both the buyer and seller should be intimately involved throughout the process to help you make informed choices.
Seek the services of a legal or tax adviser before implementing any ideas contained in this blog.