Asset Sale vs. Stock Sale: How Small Businesses Are Really Sold

When you sell a business, the structure of the deal matters almost as much as the price. There are two basic ways to do it, an asset sale and a stock sale, and for most small and mid-sized companies only one of them actually happens. Knowing which one you’ll likely face, and why, changes how you prepare.

The two paths

In a stock sale, the buyer purchases the ownership of your company itself: the shares of a corporation or the membership interest of an LLC. The entity keeps running with a new owner, and everything inside it comes along, including its contracts, its history and its liabilities.

In an asset sale, the buyer purchases what the business owns and uses, such as equipment, inventory, customer relationships, intellectual property and goodwill, and puts them into a new entity of their own. Your old company is left behind, along with most of its past obligations.

Why sellers often prefer a stock sale

For many sellers, a stock sale is cleaner. You hand over the company and walk away, and in many cases more of the proceeds are taxed at capital gains rates. Existing contracts, licenses and permits may stay in place without being re-signed.

Why the asset sale is the default

Buyers usually prefer an asset sale, and in the small-business market buyers generally get their way. An asset sale lets them avoid inheriting unknown liabilities from your past, and it often gives them better tax treatment because they can depreciate the assets they buy. Lenders, including SBA lenders who finance a large share of these deals, are comfortable with the structure. The result is that most small-business exits are asset sales, so it’s the structure most owners should plan around.

Three things negotiated at once

Inside an asset sale, three separate pieces are on the table at the same time:

• The financials. Price is driven by earnings, usually seller’s discretionary earnings (SDE) or EBITDA, recast to show the business’s true earning power. How that number is supported decides how much of your asking price survives due diligence.
• The assets. Equipment, inventory, intellectual property and goodwill all have to be listed and valued. How the price is allocated among them affects the taxes both sides pay, so it is negotiated, not assumed.
• The real estate. If you own the property, it can be sold with the business, sold separately or leased to the buyer. If you lease, the buyer needs to know the lease can be assigned and how long it runs.

How to prepare

Because each of those three pieces carries its own value and its own tax consequences, owners do best when they sort them out before going to market: clean, recast financials; an accurate asset list; and a clear plan for the real estate. Bring your CPA and attorney in early, since the structure and allocation of a sale can change what you actually keep.

Not sure how your sale would likely be structured? A 30-minute discovery session is $99 and is credited in full toward any engagement. If you already know you want a structured plan, see the 24-Month Exit Blueprint packages.