Asset sale vs. Stock sale
How can I structure the sale or acquisition of a construction business?
There are two common ways a sale of a construction business can be structured: either as an asset sale or a stock sale. Each has its benefits and drawbacks.
An asset sale is when only the individual assets are purchased. The buyer only purchases the assets and contracts of the company while the seller retains the legal entity and usually long-term debt obligations. One of the main benefits of an asset sale is that the buyer usually does not assume the liabilities of the purchased entity but only of the assets actually purchased. The liabilities stay behind with the seller’s legal entity. Additionally, the purchaser gets a step-up in basis of the assets purchased. A drawback is that the transfer of assets can be more difficult and complex as assets have to be reassigned and contracts renegotiated. Example: Company A enters into an agreement to purchase Company B. Company A purchases only the assets and contracts of Company B while the liabilities stay behind with the legal entity of Company B.
For sales of a business over $50 million, the sale is usually structured as a stock sale. This is the case because there usually are more assets in a sale of this size and structuring the sale as a stock sale makes the purchase mush simpler. In a stock sale the buyer purchases the seller’s stock and so thereby obtain ownership in the legal entity. A benefit of a stock sale is that a transfer of stock is less complicated than a transfer of assets. A drawback of a stock sale is that the buyer also gets any liabilities of the company, known or unknown as they are purchasing the legal entity. Example: Company A enters into an agreement to purchase Company B. Company A purchases the stock of Company B. This stock purchase means that Company A now owns the whole of Company B including its assets, contracts, and liabilities.