Asset Sale vs. Stock Sale – Why Buyers and Sellers may prefer one over the other

I am interested in learning more about the differences between asset and stock sales in an M&A transaction and why buyers and sellers may prefer one over the other. I am having trouble finding a comprehensive information source, but have compiled what I learned below. Please correct me and add anything I may have missed.

Differences between asset and stock sales:
* The FMV of assets are stepped up in an asset sale as the seller pays taxes on the assets sold
* Since the seller does not pay taxes on a stock sale, there is a difference in the book basis and tax basis of the target's assets (assuming a step-up or step-down in value); thus, deferred tax assets or liabilities are created
* In an asset sale, the ownership of the target's assets are transferred to the buyer
* In a stock sale, the ownership of the target's equity is transferred to the buyer

Buyers prefer asset sales because:
* The seller pay taxes
* Get a step-up in basis
* Can amortize goodwill (side question: why can't buyers amortize goodwill in a stock sale? Can it only be impaired?)
* No potential liability related to the previous Management's actions
* Downside–some assets are difficult to transfer in asset sale, e.g. IP and permits, and could potentially lose customer contracts

Buyers dislike stock sales because:
* No step-up in basis
* Inherit risk from previous management

Sellers prefer stock sales because:
* Don't have to pay double taxes like an asset sale (once at corporate level and again at the capital gain tax). Instead, with a stock sale, sellers just pay taxes at the lower capital gains tax
* Less future liabilities

Thank you in advance for your time and effort, and I look forward to any additions and corrections.

Source: [Asset Sale vs. Stock Sale: What's The Difference?], various guides and WSP course (…)

Comments (6)

May 31, 2018 - 6:17pm

Yeah, buyers tend to prefer asset sales because it protects them from assuming the target's liabilities, allows buyers to acquire only the assets it wants, and there can be a big tax benefit as you mentioned.

For a C corp I think you are right - prefer stock sales to avoid potential double taxation and liabilities associated with the Company remain with the stock while buyers. But for S corps and LLCs I think asset sales are preferred for the seller as the negative impact of selling assets isn't as sever and gain on asset sales are passed through to owners (single tax layer).

May 31, 2018 - 6:18pm

M&A - Asset vs Stock Deal (Originally Posted: 02/05/2009)

What is typically the best way to determine if a transaction is structured as a stock or asset deal? Do companies have to disclose this in the merger agreement?

May 31, 2018 - 6:19pm

Yes. If stock, it will disclose the value per share in dollars or exchange rate (in share for share deals). Any assumption of liabilities implies a purchase of stock. Absent these clues, bet on an asset deal.

May 31, 2018 - 6:20pm

Asset vs. Stock Purchases? (Originally Posted: 01/16/2009)

Hi all - can any of you please recommend some good reading material on the web that discusses asset vs. stock purchases? Anything would be helpful, particularly those that delve into the topic of taxation, as well as discussions about considerations of public-to-private transactions.

Many thanks,

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