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Asset vs. stock sale

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If the target entity is an S Corporation, an LLC, a partnership or a sole proprietorship …

… the transaction is almost always structured as an asset sale. In an asset sale the seller generally retains cash and accounts receivable but is responsible for full payment of all liabilities prior to closing, including bank debt, accounts payable and accrued taxes and expenses. Some acquirers take the stance that some working capital in the form of cash and accounts receivable should be a part of the acquisition with no additional consideration.

If the target company is a C Corporation …

… the transaction is generally structured as a stock purchase so the seller can avoid “double taxation”—taxes paid by both the corporation and the individual shareholder relating to the sale.

Acquirers almost always want to structure the sale as an asset sale. A stock sale requires much more due diligence and exposes the acquirer to a number of potential liabilities. In a stock sale, the acquirer must retain all employees of the target business and assume the net book value of assets of the target. An acquirer will often expect most, if not all, of the cash and accounts receivable to be included in the sale with no additional consideration due to this increase in exposure to potential liabilities.

Gary Stansberry is principal of The Stansberry Firm LLC and specializes in business sales, fair market business valuations and positioning businesses to increase their value.

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