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Asset Sale or Stock Sale and How the Price Gets Split

How a sale is structured can matter as much as the price, and St. Louis Business Brokers Gateway sees owners surprised by it late in the process.

This note covers the basics.

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Quick takeaways

  1. Most small company sales are asset sales, where the buyer takes the assets and goodwill.
  2. The price is divided among equipment, inventory, a non compete and goodwill.
  3. Buyers and sellers each report the split to the IRS, and the reports must match.
  4. Settle the split before you sign, and have your CPA model it first.

Two ways to sell

In a stock sale, the buyer takes your shares and the company comes along, with its history and its liabilities. In an asset sale, the buyer picks the assets and goodwill, and you keep the company that remains.

Small deals are usually asset sales, since buyers prefer to leave past liabilities behind. Larger deals more often use stock sales because ownership is more complex.

What stays with you

In many asset sales the seller keeps cash and money owed for finished work, and pays off business debt at closing. Cash free, debt free is the usual starting point.

Agree which items are included. Personal vehicles and equipment that does not affect revenue are common debates.

How the price is split

The agreement divides the price among equipment, inventory, a non compete and goodwill. Goodwill is the leftover amount after the other categories are valued.

Each category can be taxed differently. Selling equipment above its book value can trigger depreciation recapture, and goodwill is usually treated differently from equipment.

Both sides report it

Buyer and seller each file IRS Form 8594 to report the split. The two filings should agree, since mismatches raise flags. Settle the allocation before you sign instead of leaving it to be decided later.

Buyers want a different split

Buyers prefer more value in assets they can write off quickly, while sellers often prefer more in goodwill. That tension is why your CPA should model your tax before the letter of intent.

Ask early

Your attorney can tell you whether a stock sale is even possible, since some licenses and contracts do not follow the company. Ask before you agree to a structure in a letter of intent.

Missouri follow up

State taxes still matter after an asset sale. Read the tax clearance guide and the note on broker fees. When you are ready, see what your company is worth.

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