Selling a business

Asset sale or stock sale, and why the buyer cares

The offer arrives and the number on the front page is the one everybody talks about. The structure is on page four, in a sentence nobody reads twice, and it is worth a percentage of the number on the front page.

I have sat with sellers who negotiated for weeks over the headline price and accepted the structure without a question, because it looked like legal wording rather than money. Then the return comes and the proceeds they keep are noticeably different from the proceeds they expected.

Nobody hid anything. The information was in the letter of intent all along.

The headline price is not the number that matters

What matters is what you keep. Two offers at the same price can produce materially different outcomes, and two offers at different prices can produce the same one. Until you know how the deal is structured and how the price is allocated, the headline figure tells you very little.

That is not a technicality. It is the difference between the deal you think you agreed and the deal you actually agreed.

What the two structures actually do

In an asset sale, the buyer buys the things. Equipment, inventory, customer lists, the name, the goodwill. The entity stays with you, usually as a shell holding the proceeds. The buyer gets a fresh basis in what they bought and can depreciate or amortise it going forward, which is real money to them.

In a stock or equity sale, the buyer buys the entity whole. Everything comes with it, the contracts, the licences, the employment history, and also the liabilities and whatever happened in the years before they arrived. There is no fresh basis in the underlying assets. They inherit yours.

So buyers generally prefer assets and want to avoid history. Sellers often prefer equity, because it can produce a cleaner and frequently more favourable character of gain, and it ends the seller's exposure to what the business did. Both positions are rational. The gap between them is real money, and it gets split by negotiation.

You are not negotiating one number. You are negotiating the price and the structure, and the structure is worth a percentage of the price.

How big the gap is

The honest answer is a range, and it is a wide one. On smaller deals with a light asset base, the difference between the two structures can be modest, low single digits as a share of proceeds. On deals with heavily depreciated equipment, significant inventory, or a large allocation to items that are taxed at ordinary rates rather than capital rates, the gap can be much larger.

What drives it is entity type, the mix of assets, how much depreciation has already been taken, and how the price is allocated across the categories. A business that has expensed equipment aggressively for years is carrying a recapture position inside an asset sale that nobody sees until the allocation is drafted.

Rates and categories change, so treat any figure you are quoted as conditional on the year, the state, and your own facts, and model it rather than assuming it.

What getting it right requires

Three things, in order.

• An allocation that both sides agree to, in writing, covering every category rather than the two or three anyone argued about.
• Consistent reporting. Buyer and seller reporting the same allocation, because inconsistent filings are one of the easier mismatches to spot.
• Modelling before the letter of intent, with your accountant and your attorney in the same conversation rather than in sequence.

The allocation is where the last of the real negotiating happens, and it is usually done under time pressure by people who want the deal closed. That is a bad combination. Doing the modelling early means you already know which allocations you can live with before anybody is in a hurry.

Who this is not for

Some sellers do not have the choice, and reading about it will only cost them sleep. Entity type can remove the option outright. Certain structures cannot be sold as equity in a way a buyer will accept, and certain buyers will not take equity in any form regardless of what you offer them. If your structure forecloses it, the useful work is in the allocation instead, not in arguing for a door that is not there.

It is also too late for anyone who has already signed a letter of intent naming a structure. Those documents are often described as non-binding, and the structure clause behaves as though it is binding, because reopening it signals that you are renegotiating and buyers respond to that badly. I have seen a seller try, and the price moved against them by more than the structure was worth.

And it does not apply to sellers whose deal is small enough and simple enough that the structures converge. If there is little depreciated equipment, little inventory and most of the value is goodwill, the two paths can land close together. Find that out by modelling it rather than by assuming it.

When this gets decided

Early. Much earlier than most sellers expect. The structure is usually settled in the letter of intent, which is often signed within weeks of the first serious conversation, and long before the diligence, the lawyers and the accountants are fully engaged.

After that point it can be changed, but it costs something every time. Concessions elsewhere, a price adjustment, or goodwill with a buyer you still have to work with through closing.

The point

This is a planning question, not a preparation question. The return records a structure that was chosen months earlier by somebody who may not have known what they were choosing. Charter works with owners before the letter of intent, when the choice is still open and still free.

This is general information, not advice on your own situation. Whether any of it applies to you depends on facts this article does not know.