When it comes to buying and selling your printing or sign business, both you and the buyer must decide whether to structure the deal as an asset sale or a stock sale. These two different approaches to transferring ownership have implications for both the buyer and seller. This article will give you an overview of the differences and highlight the pros and cons for buyers and sellers. These transactions are complex, so it’s best to consult with professionals who can provide you with tax or legal advice based on your specific situation.
Let’s take a closer look at each method to see some advantages and disadvantages.
What is an Asset Sale?
Asset sales are sometimes characterized as cash-free and debt-free purchases. In an asset sale, the buyer purchases specific assets of the business, such as its equipment, inventory, and contracts. This type of sale generally won’t include cash (outside of working capital needed to maintain the operations of the business) and the seller typically pays off any debt obligations at closing. There can be some significant tax and legal advantages for a buyer in an asset sale. The trick is how the total purchase price is allocated as usually the high percentage of the sale is goodwill which usually favors the seller tax wise.
Advantages of an Asset Sale
Flexibility: A buyer can pick and choose which assets and liabilities they want to purchase or assume. It’s all negotiable.
Liability: The seller is generally responsible for any warranties, legal issues, and liabilities prior to sale which mitigates risk for a buyer.
Taxes: A buyer can benefit from the ability to “step up” the tax value of the assets they purchase and re-depreciate.
Disadvantages of an Asset Sale
Complexity: A buyer will have to spend time negotiating specific assets and liabilities they purchase and retitling those assets in the name of the buying entity can be an arduous process.
Employees: In an asset sale, employees don’t technically come with the business. The process usually involves having to terminate and rehire them and, if not handled properly, key employees may be at risk of leaving. This can be avoided if the seller lets his employees know that the company may be sold.
Approvals: A buyer will need to obtain approval from third parties, such as landlords or creditors, to transfer the assets; and all licenses need to be either newly applied for or transferred to the new owner.
What is a Stock Sale?
Stock sales are often easier with respect to integration because the buyer is purchasing ownership (shares or membership interest in the case of an LLC) in the legal entity that owns the business. In effect, the buyer becomes the seller. This does come with some legal challenges for the buyer as the buyer will be responsible for any trailing liability the seller may have, so be extra careful in due diligence.
Advantages of a Stock Sale:
Taxes: A stock sale generally provides tax advantages for a seller.
Simplicity: A stock sale is also considered a simpler transaction because the buyer is purchasing the entire entity. Essentially, they become the seller, which means they don’t have to mess with rehiring employees or retitling and renegotiating licenses and contracts unless there is a change in control clause.
Contracts: Contracts that are difficult to re-negotiate, such as those with the government, will often drive the decision to go with a stock sale.
Disadvantages of a Stock Sale:
Lack of Flexibility: A stock sale may not provide the buyer with the same level of initial flexibility over the business as an asset sale because they simply step into the seller’s shoes.
Liability: The buyer inherits the company's trailing liability in a stock sale and will receive any past legal or tax liabilities along with it.
Taxes: In a stock sale, the assets are often fully depreciated, and a buyer won’t receive the “step-up” tax benefit.
In conclusion, choosing the structure of the sale can have significant tax and liability differences. Whether a stock sale or an asset sale, both buyer and seller should consider the advantages and disadvantages of each method and consult with professional advisors—transaction attorneys, accountants, and a Mergers & Acquisitions advisor —to determine the best approach for their needs.
In our industry, a high majority of printing/sign company sales are asset sales except for sales to their family members, employees or if there are contracts that may be in jeopardy if there is a change in the company structure.
Mitch Evans is a management consultant and trusted advisor who works with graphic company owners, CEOs, and entrepreneurs. Mitch is a managing director at Graphic Arts Advisors LLC which specializes in Mergers & Acquisitions (valuations, buying and selling, mergers and non-bankruptcy orderly wind-downs). Mitch is also a partner with Mike Kind in The Next Level Group which facilitates formal top executive peer groups for leadership, business growth, including revenue growth, improved internal efficiencies, and greater profitability. Please contact him at mitch@graphicartsadvisors.com or call 561-351-6950.
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