Asset Sale vs. Stock Sale

Understanding the Key Differences

When selling or acquiring a business, choosing between an asset sale and a stock sale is crucial. Each structure has distinct implications for taxes, liabilities, and transaction complexity. In most Main Street Business transactions, an Asset Sale is the preferred method. One exception to this is if the subject business has contracts that are not transferable, like government contracts. When dealing with Lower-Middle Market and Middle Market M&A, the prefered method is a stock sale.

What Is an Asset Sale?

In an asset sale, the buyer purchases the assets of the business. The seller retains ownership of the legal entity. An asset sale typically includes all of the business's tangible and intangible assets, but usually does not include any cash, accounts receivable, or liabilities. If any of the assets being transferred are securing a liability, those liabilities are paid off at closing and the asset is transferred free and clear.

Buyer Tax Considerations: Buyers may benefit from a step-up in the tax basis of acquired assets, allowing for increased depreciation deductions.

Seller Tax Considerations: Sellers may face higher taxes, as gains on certain assets could be taxed at ordinary income rates. Intangible assets such as goodwill are taxed at capital gains rates, other “hard” assets can be subject to ordinary income tax rates

Illustration of business assets being transferred in an asset sale.

Illustration of complete business ownership transfer in a stock sale

What Is a Stock Sale?

A stock sale involves the buyer purchasing the seller's shares of the company, thereby acquiring the entire business entity, including all assets, liabilities, contracts and obligations. Stock sales are typically preferred on large transactions for the ease of post-closing transfer of ownership. Sellers generally favor stock sales because the proceeds are taxed at capital gains rates not ordinary income tax rates.

Comparing Asset and Stock Sales

Disclaimer: Waddell Mergers & Acquisitions is not a legal firm or CPA firm, nothing on this page should be taken as legal or tax advice. Always consult an attorney and CPA before buying or selling a business.