Asset Purchase Agreement or Stock / LLC Membership Interest Sale: Everything You Need to Know

When buying or selling a business, the transaction is generally structured in two ways. The transaction can primarily include the purchase and sale of assets or company stock. There is no “right way,” as it depends on what’s being transferred from buyer to seller, with issues such as liabilities, loans, tax, and logistics all to be considered by the parties. In this blog post, we present the differences between an asset purchase and stock agreement to give you general advice and guidance as you consider what’s best for your business.

When Should You Negotiate for an Asset Purchase Transaction?

The saying goes, “Buyers want to buy assets and sellers want to sell stock.” In the case of an asset sale, the seller is the one who remains the legal owner of the entity. The buyer in this transaction receives specific and individual assets of the company, such as customer lists, inventory, and equipment. Here are some pros of proceeding with an asset transaction:

• The buyer can depreciate or amortize assets;

• The buyer can carve out and/or dictate specific liabilities they would like to exclude or assume;

• Minority shareholders who don’t want to sell can be forced to accept the terms of an asset sale; and

• The buyer gets to decide what employees to keep.

When Should You Negotiate for a Stock / LLC Membership Interest Unit Transaction?

The most common reason why buyers choose an entity purchase is that it’s simple and the logistics of taking over a new business are streamlined. The stock purchase agreement is straightforward and can make the process of taking over a new business go smoothly. However, there are some cons that we need to highlight. The buyer can’t access specific tax benefits and could potentially receive known and unknown liabilities of the company. Nonetheless, here are the pros of a stock transaction:

• The buyer doesn’t have to change vendor or bank accounts;

• The buyer doesn’t have to retitle or reevaluate any assets;

• The buyer doesn’t require consent from customers or contractors; and

• The buyer can avoid paying transfer taxes.

What is the Best Option for a Seller?

If you are planning to sell your business but have yet to decide between an asset or stock agreement, you should consider hiring a Commercial Transactions Lawyer to discuss the specifics and how to make it most beneficial. In general, sellers prefer stock sales because the proceeds may be taxed at a lower capital gains rate. The seller may also no longer have to worry about future liabilities as the buyer will claim them in certain negotiated transactions. This includes contract claims, employee lawsuits, benefits plans, and more. The deal structure is what matters the most because it can impact both the seller and buyer. 

What is the Best Option for a Buyer?

Choosing the best purchase agreement depends on the buyer’s intention. However, buyers often favor asset agreements. Buyers will not have the ability to depreciate certain assets in company equity sales, which generally leads to paying higher taxes in the future. On the other hand, a stock agreement purchase is not the guaranteed best choice either. Choosing a stock purchase agreement means that the buyer will receive all contingent risks that might not be available at the moment of the purchase, such as employee issues or future lawsuits. Understanding the specifics of your transaction and negotiating same with competent counsel is crucial to success. We are here to help.