Asset Sale vs. Stock Sale
When a startup company wants to sell all or part of their business, they can do so in more than one way. Asset sales and stock sales are two of the most commonly accepted mechanisms of selling the startup.
It might appear to be a frivolous decision that may have no bearing on the future of the firm.
However, this is not the case, an asset sale or a stock sale can have a significant impact on the transaction and who benefits from it.
In this article, we will have a closer look at the concept of asset sale vs. stock sales and how they impact the transaction.
Difference between an Asset Sale and a Stock Sale
In the case of registered companies, the equity shareholders of the company have title to all its assets and liabilities.
Hence, if investors want to buy a company, they can either do so by acquiring the equity shares or they can choose to buy the assets.
If the investors choose to buy the equity shares of the company, then they assume the assets as well as liabilities of the firm.
Hence, if the firm has close to zero liabilities, then it should not technically make much of a difference.
However, as we will see below, buying the equity shares of the company or the asset base of the company can have a huge impact on various factors related to the transaction
Impact of Choosing Between Asset Sale and Stock Sale
- Taxation: The choice between an asset sale and a stock sale can become quite complicated when the impact of taxation is taken into account.
For instance, if a firm sells its assets, then it will receive consideration from them in the form of cash. If the sale price of assets is higher than the purchase price, then the difference will be treated as profit from business and will be taxed at the prevailing rate for corporate income.
Since the income tax rate can be quite high, it can lead to a significant tax liability for the selling company. Also, since the company is likely to be closed after the sale, the proceeds of the asset sale need to be distributed in the form of dividends.
It is highly likely that the selling company will have to distribute the proceeds in the form of dividends. Here too, the selling company will have to pay dividend distribution tax.
Hence, in the event of an asset sale, the selling company is subject to double taxation.
On the other hand, the buying company can show the assets being acquired at a higher price as assets on their balance sheet.
They can then charge annual depreciation on these assets. This annual depreciation charge can be used to reduce the taxable income of the buyers for many years.
- Protection from Liabilities: It is a known fact that smaller startup firms do not have very high reporting standards. It is quite likely that off-the-book liabilities such as potential lawsuits have not been informed to the buyer.
In such cases, if the buyer buys the firm, they are responsible for the liabilities of the firm as well.
However, if they buy only the assets, then they are not a party to the previous liabilities of the firm that they have purchased.
Hence, investors may prefer to use the asset sale method since it minimizes their potential liability.
- Transaction Costs: The transaction costs related to asset sales can be much higher.
This is because for the asset sale to take place, the buyer will have to appoint an appraiser who will have to submit a report about the market value and present condition of each of these assets.
The buyer will then have to create several different types of paperwork to record the transfer of an asset from the seller. Also, the buyer may have to pay different types of transaction charges.
For instance, if the asset being acquired is land, stamp duty may be applicable. These transaction costs are likely to be at a higher rate as compared to stocks.
When a stock sale is completed, there is very little money to be paid in the form of transaction costs and also the transaction costs are very low. Hence, a stock sale can be considered to be the more efficient method to transfer business assets.
Relative Bargaining Power
From the above points, it’s quite clear that the asset sale method is likely to be preferred by buyers. This is because they can push a lot of the costs to the sellers and get a better price for themselves.
On the other hand, the stock sale method is preferable to the seller since they will be able to obtain more value for their money.
Hence, the question of asset sale vs. stock sale ultimately boils down to be a question of who has more bargaining power. If the seller has many options, then the buyer will have to agree to a stock sale in order to woo the seller.
On the other hand, if the seller has no options, then they will have to accept whatever deal is being provided to them.
The bottom line is that the decision to sell the company via an asset sale or via stock sale can be a strategic decision since it can have a long-term impact on both parties.
Authorship/Referencing - About the Author(s)
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Seed Funding - Introduction
- Why is it Difficult to Raise Seed Funding?
- Documents Required for Startup Financing
- How Co-Founders Split Their Equity?
- Proof of Concept
- Minimum Viable Product
- What is Prototyping?
- Asset Light Business Model
- Advantages of Asset Light Business Model
- Disadvantages of Asset Light Business Models
- Cash Burn Rate: The Basics
- Managing the Cash Burn Rate
- Startup Financing and Term Sheets
- Key Terms and Conditions in a Term Sheet of Startup Funding
- Red Flags that Investors Need to Look out for in Term Sheet
- The True Cost of Owning a Property
- Valuation of Early-Stage Startups: The Mindset of Investors
- Pre Money and Post Money Valuation
- Start-Up Valuation: Advanced Concepts
- How Pre-Revenue Companies are Valued?
- Valuation Divergence - Meaning and its Importance
- How Do Option Pools Work?
- What are Capitalization Tables?
- Asset Sale vs. Stock Sale
- Financial Models for Startups
- Key Performance Indicators for Startups
- Restricted Stock Options (RSU’s)
- Veto Rights - Meaning and its Importance
- Financial Benefits of Incubators
- What are Unicorns?
- Why Startup Companies are Staying Private?
- Why Unicorn Companies Fail?
- Building a Startup Team
- Bootstrapping: Meaning and its Advantages
- Disadvantages of Bootstrapping
- Revenue Based Financing
- Convertible Notes and Startup Funding
- Pros and Cons of Convertible Notes
- Simple Agreement for Future Equity (SAFE)
- Keep It Simple Securities (KISS)
- Series A Funding
- Series B Funding
- Series C Financing
- Venture Debt in Startup Funding
- Pros and Cons of Venture Debt
- What is Venture Leasing?
- The Freemium Model - Different Types of Freemium Models
- Pros and Cons of Freemium Model
- Scalability and Startups
- Pros and Cons of Scalable Business Models
- Why Do Start-ups Fail After Receiving Funding?
- Start-ups and Arbitration
- What is a Revenue Model?
- Understanding Investor Focus on Burn Rate
- How Investors Evaluate Start-up Ideas?
- Government Regulations Which Impact Start-Ups
- What is a Start-up Accelerator?
- Managing the Operational Metrics of a Startup
- Different Types of Investors
- The Founder’s Dilemma
- Role of Social Media In Start-Up Funding
- Start-Ups and Public Relations
- Red Flags for Start-Up Investors
- IPO: An Exit Route for Start-Ups
- What is Acqui-Hire?
- How to Build a Start-Up that gets Acquired?
- Legal Issues Faced by Start-up Companies
- Corporate Venturing
- How Reverse Pitching Works?
- Aggregator Business Model
- Marketplace Business Model
- Difference between Aggregator and Marketplace Business Models
- Product as a Service (PaaS)
- Benefits of Product as a Service (PaaS) Model
- Disadvantages of Product as a Service (PaaS) Model
- The Co-Working Business Model
- How Co-Working Spaces Make Money?
- Peer to Peer (P2P) Business Model
- The Instacart Business Model
- The Goodleap Business Model
- The Twitter Story
- How Tesla Reinvented the Automobile Industry?
- How Epic Games Changed the Gaming Industry?
- The SpaceX Success Story
- The Stripe Business Model
- The TikTok Business Model
- Zillow Story - The Real Estate Marketplace
- How Business Cycles Affect Start-Up Companies
- Managing Start-ups During an Economic Downturn