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In a business sale, is a stock or asset purchase better?

by Kelly Gicale | Contributor
November 29, 2021

The sale of a business involves many different considerations for both the buyer and the seller. Chief among them, regardless of which role you find yourself in, is whether to complete the sale as a stock purchase or an asset purchase.

Perhaps you are already aware that a buyer generally prefers an asset purchase, while a seller would typically prefer a stock purchase. But do you know the reasons behind that paradigm?

If you own your own business and are considering selling at some point in the future, then it will be useful to understand the mechanisms, benefits and disadvantages of selling your company in a stock purchase or an asset purchase. Similarly, if you are in the position to acquire a business, you will want to know what's at stake, especially regarding business liabilities, when determining your offer and negotiating the terms of the sale.

What is a stock purchase?

In the context of a business sale, a stock purchase simply means that the buyer sells their ownership interest through a straight transfer. In this kind of sale, the buyer acquires the business assets and liabilities. The transaction is straightforward, and the transfer is generally completed relatively seamlessly.

However, to account for potential hidden liabilities, the contract often contains provisions that offer some degree of protection for the buyer. Through contract representations and warranties, the parties often have options in case post-closing issues arise. These are generally enforceable via a cash hold-back where the buyer can withhold the final purchase payment if the representations and/or warranties are not met. Alternatively, the buyer can offer an additional bonus if the business is especially successful after the sale in order to motivate the seller to fulfill his or her promises.

What is an asset purchase?

An asset purchase, on the other hand, occurs when the person acquiring the company only buys certain business assets. This may include equipment, licenses, goodwill (the intangible value of your business's reputation), customer lists or inventory. In this kind of sale, the legal title to the business entity remains with the seller, and assets not included in the sale will also continue to be owned by him or her.

Typically, the company's cash on hand also stays with the seller, but he or she will pay all non-trade debt so that the business is transferred cash-free and debt-free (aside from cash needed for daily operations and vendor/trade expenses). An asset purchase tends to be more complicated than a stock purchase because there are inherently more issues or items that require negotiation. In addition, transferring ownership of specific assets may require additional actions to be taken, like having real estate re-titled in the name of the new owner.

Advantages of a stock purchase

For the buyer

With a stock purchase, the buyer receives all parts of the company as part of the transaction, so he or she generally does not need to spend time and money to re-value or re-title business assets. In addition, employees of the business remain legally employed by the new owner without having to take further action, which may not be so with an asset purchase.

The buyer in a stock purchase may also be able to avoid headaches associated with assets that are difficult to transfer due to issues relating to assignability, legal ownership, and third-party consents. This can include intellectual property rights in patents and trademarks, licenses, leases and permits. However, although most of these assets will pass more easily through a stock purchase, it is still extremely important to perform due diligence and review all third-party contracts to ascertain the favorability of terms and determine if those contracts need to be independently confirmed, or even approved or renewed.

Finally, the buyer may receive some tax benefits in this kind of sale. Because all assets transfer, any goodwill received by the buyer can be amortized for tax purposes over a period of years. In addition, if you live in a state where you could be subject to taxes for the sale or transfer of business assets, you may be able to avoid those with a stock purchase.

For the seller

Stock purchases are generally favored by sellers because they are relatively simple and straightforward, and because they enable the seller to offload business liabilities along with assets. The buyer in this instance can essentially walk away after the sale closes. As a result, a stock purchase enables the seller to transfer ownership and avoid having to deal with any lingering business liabilities, which is not the case with an asset purchase. The prospect of receiving a substantial sum of money and avoiding issues with business liabilities and specific asset negotiation makes this purchase option much more appealing to most business owners.

Downsides of a stock purchase

For the buyer

As mentioned above, concerns about assignability of permits or rights and other third-party issues can make a stock purchase unattractive for the buyer, as these could be avoided by picking and choosing assets that do not have these concerns in an asset purchase. This is because the buyer does not have the same opportunity to review and potentially reject oppressive contract terms with a third party that would otherwise be available in an asset purchase.

In addition, the overall downside for a buyer in this arrangement is that he or she must receive all assets and liabilities absent a separate agreement. This means that toxic or problematic aspects of the business will be included in the transfer unless the buyer and seller execute a separate agreement pertaining to that liability.

Finally, while the buyer has some tax benefits available to him or her in a stock purchase, an asset purchase offers much more greater tax advantages, as explained below.

For the seller

In general, there are very few downsides to a stock purchase for the seller. He or she can more easily complete the sale without remaining entangled in the business assets, or more importantly, business liabilities.

However, if as a seller it is important to you to retain ownership of the business entity or certain assets owned by the company, then the stock purchase would not be recommended. While there is the potential to negotiate to keep certain assets in a stock purchase, it would entail additional contractual arrangements that could negate the ease of transfer offered by this kind of sale.

Advantages of an asset purchase

For the buyer

In most situations, an asset purchase benefits the buyer because it enables him or her to purchase specific business assets. In this way, the buyer can avoid liabilities for any assets not contained in the sale, which is especially useful with toxic or problematic assets that would almost certainly be included in a stock purchase.

Additionally, the tax benefits of an asset purchase can be advantageous for the buyer in an asset purchase. This is largely because in an asset purchase, you have the ability to apportion the purchase price to those assets that depreciate the fastest. As section 167 of the Internal Revenue Code allows for a depreciation deduction of certain property from gross income, a shorter depreciation period can enable you to receive the tax benefit much sooner. Consequently, in an asset purchase, the buyer can work with an experienced tax advisor to assess each business asset and determine which assets would be most beneficial tax-wise to apportion more of the purchase price.

For example, inventory and fixed goods tend to be the most advantageous for apportioning purchase price. This is because these categories of assets can be expensed when they are sold in the ordinary course of business. This would reduce the buyer's taxable gross sales income, which reduces the buyer's tax liability. Similarly, fixed goods like equipment can also be depreciated fairly quickly. On the other hand, goodwill and other intangible assets must be amortized over a much longer period of time (generally 15 years), which makes them less desirable for allocating purchase price.

Document signing for an asset purchase

However, there are issues to bear in mind when considering these tax benefits. First, the buyer and seller must agree to the allocation of purchase price. In addition, even if they agree, the purchase price cannot be allocated to one asset and cannot be configured in such a way as to be viewed as a misappropriation done solely for the tax advantage. It's also important to understand the nuances of these calculations, as the tax consequences can vary widely if you overlook the details. For instance, in the context of intangible assets like goodwill and a non-compete covenant, the seller can treat the goodwill as a capital asset for tax purposes, while the non-compete will be treated as ordinary income and taxed at a higher rate. Similarly, the buyer should be advised to carefully allocate asset basis so that it correlates to fair market value for each.

For the seller

Overall, there are few reasons for a seller to prefer an asset purchase over a stock purchase. The process and negotiations are typically more complex, and it often requires the owner to take other actions to liquidate or close out the business and/or remaining assets after the sale has closed.

As mentioned above, the only real reason a seller may desire an asset purchase is to retain ownership of the business entity or to hold onto certain business assets, as the process is designed for both outcomes. If a business owner is interested in selling his or her company and moving on or retiring, however, then an asset purchase is not ideal in most instances.

Downsides of an asset purchase

For the buyer

In an asset purchase, the employees are typically not retained as they would be in a stock purchase, so the buyer will have to re-hire key employees after the sale. This can involve the frustrations and cost of contract negotiation, and it could potentially require other incentives to entice important employees to remain with the business.

Additionally, contracts with third parties, including agreements with vendors and clients, may need to be revisited or possibly renegotiated after an asset purchase. This is because these contracts do not transfer as automatically as they would in a stock purchase.

It's also important to know that assets acquired by the seller may need to be re-titled after an asset purchase. This can be a time-consuming and expensive process depending on the asset, and you can often avoid this requirement in a stock purchase.

Finally, because of the tax implications explained above, which are more advantageous to the buyer than the seller, the seller may require a higher purchase price to offset the taxes that he or she could owe.

For the seller

The major downsides of an asset purchase for the seller are continued liability ownership, greater entanglement in the business post-sale, and potentially higher tax burden. In this kind of sale, the seller is intentionally left with undesirable assets and liabilities held by the business. This means that the seller will need to take additional actions in order to satisfy the debts and/or liquidate toxic assets to get them off the books. In addition, while a stock purchase generally allows the seller to walk away after the sale is closed, an asset purchase does not give the seller that option. By the nature of the piecemeal sale, the seller will have further involvement in the business and remaining assets before he or she can truly wash their hands of it. Finally, the tax burden can be much greater for the seller in an asset purchase because of the configuration of purchase allocation.


While it is certainly not the case that every seller will benefit more from a stock purchase and every buyer will benefit more from an asset purchase, you can see that each of these types of business sales offer advantages that tend to favor one party over the other. Regardless of whether you are thinking of selling your business or acquiring one, it is useful to understand the ins and outs of each kind of sale so that you can decide upon the best one to pursue given your specific circumstances. It is also invaluable to seek the advice of an experienced tax and business professional when embarking on either form of sale, as their advice and insights could prove to be the difference between a lucrative and positive experience and a drawn-out negative one.

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There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

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