Understanding the difference between an asset sale and a stock sale is a key element of any business transaction.  

Throughout the course of a business sale, a lot of energy is exerted in determining a price and marketing the business that is for sale.  However, as the process progresses some sellers will often ask seemingly innocuous questions similar to this one, “will my checking account transfer over to the new owner?” 

Although this question is an easy one to answer, the underlying principle is a bit more complicated and very important to understand.  The underlying issue at-hand is that small business sales are almost exclusively handled as asset sales.  The alternative to this, and the one that is more commonly pursued by large publicly traded companies, is the stock sale. 

The crux of the matter lies in liability and taxes.  The next few paragraphs will delineate the liability and tax concerns. 

During a stock sale, a buyer (or group of buyers) purchases a company, the assets in it, and all of the goodwill.  Everything transfers over to the new owner.  All liability for past actions in the realm of law, environment and fiscal matters transfers to the new owner.  Additionally, the credit history of the company transfers to the new owner as well. 

The Asset Sale 

On the contrary, during the standard small business sale (an asset sale), all of the assets and goodwill transfer to the new owner, but all legal, environment, monetary and credit history liability stay with the seller.  The seller still owns the LLC, S-Corp, etc but all of the assets and goodwill have been sold.  Therefore, the seller maintains liability. 

Who Gets What?

The distribution of assets in an asset sale is also an important point.  (Not that AR, AP, and Cash are depicted as the sellers; as a practical matter the buyer may take AR and AP, but are typical passed through at cost).

Tax Matters 

Another key issue is related to tax dollars.  During the asset sale, the buyer is allowed to “step-up” the asset value, which allows her to then depreciate those assets.  The seller, on the other hand, is taxed on the sale as if it were ordinary income.  The opposite is true during a stock sale; the buyer can not “step-up” the value of the assets to their current book value and the seller pays long-term capital gains taxes instead of ordinary income tax. 

Liability Issues 

Although the tax question is a definite concern, the driving force for small businesses selling as asset sales is related to liability.  New business owners simply will not inherit the liability and purchases the goodwill and assets.  Below you will find a chart further delineating ownership for all interests after an asset sale has occurred.