The Difference Between – Stock Sale Vs Asset Sale
Very often, someone will call me and say “I am interested in buying a practice. The owner gave me a price of $XX. Is that a fair price?” My next question is usually followed by silence. I ask them: “Is it a stock or asset sale? In other words, what are you buying?”
Most OD’s Are Unaware
Since this is such an important decision, and most ODs are unaware of its importance, let’s talk about the difference between a stock (ie equity) sale versus an asset sale. In an asset sale of an optometry practice, the buyer is purchasing assets as listed on an asset purchase agreement – typically the equipment, inventory, and goodwill of the practice. The corporate entity receives that money. What is not included is any cash in the corporate account, accounts receivable, or liabilities. In a stock sale, the shareholders are selling their stock shares in the business and company ownership is transferred “lock, stock and barrel” to the buyer. This includes cash, accounts receivable, and corporate liabilities. The sale proceeds are received by the shareholders.
Which Is Better For You?
So what’s the difference? And which is better? Well, it depends on which side of the fence you’re on. Simply put, sellers prefer stock sales; buyers prefer asset sales. And I’ll let you know right now, most sales in which the owner is walking away, are asset sales. From a buyer’s perspective, there are two big advantages to an asset sale: 1) In a stock sale the buyer is purchasing the corporation “as is”, including all the liabilities, both known and unknown. If someone slipped and fell in the waiting room last year and decides to sue the corporation, or if a vendor had been “stiffed” years earlier and now wants their money, it is now the buyer’s problem. 2) In a stock sale the buyer takes over the corporate balance sheet “as is”. In most optometry practices, there is a lot of equipment that has been fully depreciated, although it is still being used and has value. For example, a fully equipped exam lane purchased five years ago, has been fully depreciated and thus shows zero “book value”, but may have a fair market value of $10,000. The asset sale allows the buyer to “step up” the basis of those assets, and depreciate that $10,000 on their tax return as an expense. That can’t be done in a stock sale.
There Is A Lot More To It Than Just The Price!
There are situations in which a stock sale is indicated. In situations with multiple shareholders, it usually makes sense for an outgoing shareholder to simply sell his or her shares in the corporation. A stock sale also makes sense if there is a favorable contract or lease agreement with the corporation. For example, if the corporation has a long term lease agreement in which rent is significantly below fair market value. The buyer wants to continue that lease. Should the corporation dissolve, the landlord would write a new lease that would most certainly reflect a higher rent.
My advice? Involve your financial team early in the process of any transaction. There is a lot more to it than just the price!
If you would like to hear what your colleagues are saying about McDaniel & Scibal Consulting please follow this link Testimonials