Asset Sale or Stock Sale for a California Company

A Buyer of Assets and a Buyer of Shares Get Different Things

In an asset sale, your company sells its equipment, inventory, customer lists, phone numbers, website, trade name and goodwill. The buyer usually forms a new entity to hold them. Your entity stays with you.

In a stock sale, you sell your ownership. For an LLC that means membership interests rather than shares, but the idea is the same. The buyer gets the whole entity: its bank accounts, contracts, permits, employees and its full history.

That last part is what makes buyers careful. Taking the entity means taking everything it ever did, including the things nobody has found yet.

An asset buyer picks what it wants from your company. A stock buyer takes your company, past and all.

Why Most Deals Under About $2M Close as Asset Sales

Smaller deals, up to about $2M in price, are usually asset sales priced on SDE. Larger companies priced on EBITDA sell as stock sales more often, partly because their ownership is more complex.

The reasons a smaller buyer prefers assets are practical. They avoid unknown liabilities.

They usually get a fresh tax basis in what they bought, which lets them write off equipment and goodwill over time and lowers their tax on future profits.

Financing pushes the same way. Most smaller deals are paid with some mix of cash, an SBA loan and a seller note, and lenders tend to be comfortable with a clean purchase of assets into a new entity.

For most sellers, then, the asset sale is a given. The real work is in how it is built, starting with what is included and how the price is split.

Splitting the Price Is a Negotiation, Not Paperwork

In an asset sale, the buyer and seller agree how the total price is allocated across categories of assets. Both sides report the same split to the IRS, so it has to be settled in the purchase agreement.

The categories are taxed differently.

For federal purposes, goodwill held for years is generally a capital gain for you. Equipment you already depreciated can be taxed partly as ordinary income. Payments for a noncompete or consulting are usually ordinary income.

The buyer wants more of the price in things it can write off quickly, such as equipment. You usually want more in goodwill. The tension is normal. It only becomes a problem when nobody notices it until the closing documents.

Here is an illustrative example with round numbers, not tax advice. A company sells for $1,500,000. One draft puts $300,000 in equipment, $100,000 in a noncompete and $1,100,000 in goodwill.

A second draft moves $200,000 from goodwill into equipment. The price is identical, but more of your proceeds may now be taxed as ordinary income federally. Your CPA can show you what that difference is worth before you agree.

Liabilities Stay With Whoever Owns the Entity

In an asset sale, your entity keeps its debts, lawsuits, tax filings and old obligations unless the buyer agrees to take specific ones. You pay off what you owe, often from escrow, and wind the entity down later.

That does not mean the buyer is fully insulated. California has rules that reach asset buyers.

Bulk sale notices let creditors make claims, and the state's sales tax successor rule makes buyers hold back money unless you produce a clearance.

Our notes on California bulk sale rules and the CDTFA tax clearance explain both. Expect escrow to request them whether or not you think they apply.

In a stock sale, liabilities stay inside the company the buyer now owns. Buyers handle that with heavier diligence, broader representations from you, and a larger holdback or escrow that sits for a period after closing.

Which Contracts and Licenses Will Not Simply Move?

This is where a stock sale can earn its keep. When the entity does not change, many of its contracts and permits stay in place. In an asset sale, each one has to be assigned, reissued or replaced.

Items that often need attention in an asset sale:

• Your commercial lease, which almost always needs landlord consent
• Customer and vendor contracts with clauses that bar assignment
• Government contracts and some insurance policies
• City, county and state permits, which are often issued to a specific owner
• An alcohol license, which has its own transfer process and escrow
• Software licenses and merchant accounts tied to your entity

A stock sale is not a free pass. Many leases and contracts treat a change in ownership of the tenant or party as an assignment that still needs consent. Read the change of control language, not only the assignment clause.

See our notes on assigning your commercial lease and transferring a liquor license if either applies.

C Corp Owners Feel the Difference Most

If your company is a C corporation, an asset sale can be taxed twice. The corporation pays tax on its gain from selling the assets. Then you pay tax again when the remaining money comes out to you.

That is why C corp owners often push for a stock sale, where they are taxed once on the sale of their shares. Buyers resist for the reasons above, and the gap usually gets settled in price, structure or both.

S corporations and LLCs taxed as partnerships generally pass the gain through to the owners, so an asset sale is taxed closer to once. There are exceptions, including companies that converted from C corp status, which your CPA should check.

The entity question is worth asking years before a sale, not months. Some planning options only work if the structure was set up early.

California Taxes the Gain Like Ordinary Income, So Model It First

The Franchise Tax Board does not give capital gains a lower rate than wages. Whatever the federal treatment, the state taxes your gain at regular income tax rates. On a sale of this size, that bite is large.

Taxes are usually a bigger cost than any fee in the deal. Have a CPA model your net proceeds under the structures being discussed, including the allocation, before you sign an LOI. After the LOI, your room to change the structure shrinks.

Questions worth bringing to that meeting: What is my basis? How much depreciation would be recaptured?

What would a stock sale net me, if a buyer agreed? Does my entity history create any surprises? How should the seller note, if any, be reported?

This page is general information, not legal or tax advice. Your facts will change the answer, so confirm the structure and the allocation with your attorney and CPA before you commit to either.

If you want a sense of what your company could sell for before that conversation, request an estimate or call (415) 555-0163.