What are You Selling? Stock Versus Assets
By Don Beezley © 2025
When it’s time to sell your business, you may naturally assume that you are selling the legal entity, “XYZ, Inc.” That may be the case, but in the sale of smaller businesses it is often the assets of the business you are selling while you keep the legal entity after closing.
Nothing herein should be construed as tax or legal advice and is for general educational purposes only. Always seek proper tax and legal advice from a qualified attorney and tax advisor when buying or selling a business.
When a buyer buys your business, they have two basic options:
1) Set up their own entity—”Buyer Company Inc”—and have it buy and operate the assets from your business, leaving your entity with you as mostly an empty shell you continue to use for other purposes or shut down at some point, or;
2) they can do an “equity” purchase and buy the actual stock (in the case of a corporation) or membership interest (in the case of a Limited Liability Company or “LLC”) in your entity and become the owner of the entity itself, including all the things—the assets—the entity owns. The term “equity purchase” covers all such variations, but for the rest of this article, we’ll call it a “stock purchase.” In this case, they would also be getting the name of the business, and you would change the name of your entity if it conflicts with the business tradename.
Why do one or the other? Each type of transaction has different tax, legal, and financial implications.
Which is better? It depends on your viewpoint.
Taxes
In a stock sale, a seller may get more favorable tax treatment. More of the gain on your sale may be subject to capital gains tax rather than ordinary income tax, which may represent a tax savings. For the buyer, from a tax perspective, in an asset purchase, the buyer gets the full tax benefit of depreciating the assets they buy. For example, if you have $500,000 market value in assets you have depreciated to zero, the buyer can take that “basis” back up to $500,000 and depreciate it all over again. In a stock deal, they simply take over the assets as they are on your balance sheet. If you have already taken 100% of the depreciation benefit, then the buyer loses out on all that depreciation benefit, which reduces their return by increasing their future taxes, which can be a large financial factor, especially in an asset intensive business such as heavy construction.
If you have a C Corporation, a stock purchase may have greater incremental benefit for the seller as it may help avoid double taxation on the sale. Of course, a buyer may or may not want to inherit a C Corporation, which has some tax disadvantages in its own right.
It’s also possible to do a stock sale but have it treated as an asset sale, called a “338 election”.
Ease of Transaction
A stock purchase is a more seamless transaction for both parties—everything in the business is effectively transferred in one process—the sale of the equity interest. For example, if you have ten trucks owned by the entity, then they stay the property of the entity which is now owned by someone else. In an asset purchase, each vehicle is sold individually to the buyer and their entity and has to be individually transferred and retitled. The same is true of things like customer contracts or a real estate lease. It is important to note however, that contracts, leases, loan agreements, etc. may have “change of control” provisions that still require the permission of a third party such as a customer, bank, or landlord, even in a stock sale.
Liability
A major concern buyers have about a stock purchase is liability. When they buy the legal entity, all of its history comes with it. Even though you will “indemnify” (protect them against damage) for that history, it still carries risk.
Naturally, there are many combinations and possibilities that go beyond the above to try and manage tax, liability, and transfer of ownership issues, but the above are the two headline types of sales. Always consult a qualified CPA and Attorney when considering offers and combinations of legal structures.
Don Beezley is President of Proforma Partners, LLC and a Business Certified Appraiser (BCA) with over three decades of M&A, banking, and business operations experience.