Practice Areas

Blog

News

Library

Asset Sale or Stock Purchase? What's Best for Buyers?

Determining what is being sold, the individual assets of a business or the stock in a company, will be critical in determining the optimal structure of a transaction. The majority of Maryland small businesses that are sold each year are structured as an asset sale. An asset sale is when a buyer purchases all or a portion of the assets of a business (e.g., facilities, equipment, vehicles, real estate, etc) whereas a stock purchase is the purchase of the ownership shares/rights of the corporation - all assets and all liabilities of the entity are retained by the corporation and only a change in corporate ownership has occurred.

The following highlights three notable differences between each method; there are many additional considerations so it is critical to consult professional advice to determine the most appropriate method.

Change in Legal/Tax Entity:

With an asset sale, the legal entity and tax identity do not transfer to the purchaser. The Buyer receives a stepped-up tax basis in the assets acquired equal to the FMV purchase price, the point from which new depreciation is started. Under a stock sale, the tax basis of the assets remains unchanged, and all of the tax attributes, including depreciation methods, tax year, corporate tax election, are preserved.

Liability:

With an asset sale, the Buyer's liability is limited. The Buyer is purchasing some or all of the assets and has the option to identify any liabilities they are interested in assuming. Under a stock sale, the Buyer purchases the stock of the company and assumes all liabilities (known, unknown, contingent or otherwise).

Assignment of Contracts:

Most Maryland businesses have contracts in one form or another. The most common are commercial real estate leases, contracts involving business relationships, and contracts with employees. An asset sale transaction involving the assignment of these contracts requires considerably more work and has a potentially a different outcome than a stock sale. Contracts need to be evaluated to determine if they permit an assignment without consent. Should they not permit assignment without consent, third party consent will need to be obtained.

In stock sale transactions, the legal entity that is the party to the contract continues, and the general rule is that the contract remains in force between the original parties. (No consent to assignment is needed as assignment typically does not occur). There are exceptions, as some contracts stipulate that a change in ownership of the business will be considered an assignment of the contract. If such a 'change of control' clause exists in the contract, the same issues will arise as with an asset transaction. Performing due diligence and having legal counsel thoroughly review all of the company's contracts will be critical to determine the available options.

FAQ