Asset Sales vs. Stock Sales - Which is the best deal structure?
There are numerous types of deal structures, but the two most common types of deal structures for internet business transactions are asset sales and stock sales. As an experienced website broker, I have advised on many transactions that are structured as an asset sale, stock sale and even hybrid deal structures that are half asset sale and half stock sale. Most ecommerce business brokers prefer to structure deals as an asset sales because an asset sale is far more simplistic and offers more protections for both the buyer and the seller. A website broker usually requires a special reason to structure a deal as a stock sale, especially since there is more liability assumed by the buyer with a stock sale. The main difference between an asset sale compared to a stock sale primarily revolves around liabilities and preserving the existing business entity. With an asset sale, the buyer is simply purchasing the assets of the business entity from the seller, not the liabilities (known or contingent) that are associated with buying the existing business entity. This is the primary reason most ecommerce business brokers recommend an asset sale over a stock sale. With a stock sale, the buyer is purchasing the stock of the existing business entity, which results in the existing business entity remaining active. There is more risk associated with this deal structure because the buyer is now responsible for any future liabilities that might arise in the future as a result of when the seller was operating the business. Stock sales also make taxes more complicated for both parties since the existing business entity remains active. Because of all the negative attributes of a stock sale, a website broker needs a good reason from the seller with regard to why he or she wants to pursue this type of transaction.
In our experience as ecommerce business brokers, stock sales are usually warranted if there is a obvious reason why the existing business must remain active. One of the more popular reasons for stock sales revolves around existing supplier relationships with the original business entity that simply can't be transferred to a new business entity. For example, if Smith Corp has a supplier relationship that took years to establish and Smith Corp receive volume pricing discounts (that were achieved over time), the incoming buyer wouldn't get the same pricing discounts if the buyer setup a new LLC because that supplier relationship with the seller's LLC can't be transferred to a new LLC. As a result, if the deal in this example was structured as an asset sale, the buyer would be forced to setup a new LLC and wouldn't be eligible for the same supplier volume pricing discounts that Smith Corp already receives. This would change the COGS expense and thus change the net income which ultimately hurts the company's valuation. Our website brokers always prefer to structure asset sales over stock sales because they are far less complicated, but sometimes a stock sale is absolute necessary. When a stock sale is absolutely required, our ecommerce business brokers have crafted creative deal structures that reflect a hybrid structure, ensuring both parties receive adequate protections in the final purchase agreement which can be partially structured as a stock sale and asset sale.