Asset Sale vs. Stock Sale

by Jan. H. Raymond

Logistics Companies Are Sold In One Of Two Forms:

1. “Substantially all of the assets” (“asset sale”)
2. Sale of the shares (corporation) or member interests (LLC) (“stock sale”)

To understand the basic difference between the two types of sales, imagine your company as a carton filled with goods. When you incorporated your company, you created a box. In that box you put some money (capital contribution) to get the company started. Then you started adding things like a lease on office and/or warehouse space, employees, bank accounts, licenses, office furniture, office supplies, etc.).

• When you have a stock sale, you are selling to the buyer the entire box along with all of its contents.
• When you have an asset sale, you are selling to the buyer most (but not all) of the contents of the box, but not the box or some of its contents.

So, in a stock sale, everything on the balance sheet (all of the assets and all of the liabilities) of the company is sold to the buyer. But in an asset sale, only some of the items on the balance sheet are sold to the buyer. Which items are sold to the buyer and which ones remain with the seller is a negotiation point.

A Buyer Will Generally Prefer To Do An Asset Purchase For Two Reasons

1. In so doing they will not assume/buy any of the liabilities of the company
2. There may be preferable tax treatments for the buyer in an asset sale (as opposed to a stock sale).

A Seller Will Generally Prefer To Do A Stock Sale For Two Reasons

1. By not retaining the corporate shell (i.e. the carton) and any remaining contents, the Closing of the sale completes the process of selling the company
2. There may be unfavorable tax treatments for the seller in an asset sale (as opposed to a stock sale).

There are often reasons that a stock sale will be preferable to a buyer. The most frequent reason that a buyer will prefer a stock sale is because government licenses, necessary for the continued operation of the business, are not transferable/saleable in an asset sale. In essence, the licenses and permits are glued to the carton so cannot be sold separate from the carton.

Regardless of whether the sale is in the asset form or stock form, the seller will be required, in the purchase and sale agreement, to make a set of representations and warranties to the buyer about the pre-Closing operation of the business. The seller will be liable to indemnify the buyer for any representations or warranties that are either untrue or incomplete. The most important representations and warranties go to the potential for post-Closing claims to be brought against the buyer attributable to pre-Closing operations of the business. With rare exceptions, regardless of the form of sale, the seller will be expected to be liable for all liabilities of the business that arise from pre-Closing operations. The one exception to this is that the pre-Closing accounts payable pass to the buyer in a stock sale. However, this is offset by the fact that the pre-Closing accounts receivable also pass to the buyer in a stock sale. In both asset sales and stock sales, who keeps the accounts receivable and the accounts payable goes to the calculation of “net working capital”; a subject addressed in a separate article.

When sellers negotiate the terms of a sale transaction, they think first and foremost about the “sale price”. However, at Logisyn, we focus on maximizing the “net proceeds” to our client. In other words, we focus not on some “number” that might look good on paper, but, rather, how much of that number ultimately finds its way to the pockets of our client.

As detailed above, the form of transaction, asset or stock, may have different tax treatments to the seller. While Logisyn does not provide tax advice, we work directly with your tax advisor to negotiate transaction terms that minimize your adverse tax treatments to maximize your “net proceeds”.

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