When a business is sold to a third party, the buyer generally prefers to purchase a company’s assets rather than its stock, whereas the seller would rather sell the stock. As a result, the decision of asset sale or stock sale is often subject to the negotiation process. A very powerful benefit of selling to an ESOP is that an ESOP transaction is always a stock sale.
LEGAL BENEFITS OF A STOCK SALE
For the business owner, a stock sale is generally more favorable from a legal standpoint than an asset sale. By using an ESOP to acquire the company, the assets and liabilities of the company (both known and unknown) are transferred as part of the sale. The legal title of assets will not need to be separately transferred (in an asset sale the legal title would likely need to be transferred). Important legal contracts in the name of the company, such as leases, employee-related agreements, and vendor contracts, will generally continue to be in effect after the sale of stock (in an asset sale the contracts will likely need to specifically provide for assignment of the contracts without consent).
This means that a business owner is able to walk away from many of the risks associated with being a business owner, including existing contractual obligations, taxes, employee benefit plans, or potential future liabilities, even if the business owner retains control of the company after the sale to the ESOP.
TAX BENEFITS OF A STOCK SALE
It is also generally more favorable from a tax standpoint to sell your company in a stock sale. A stock sale will generally be taxed at capital gains rates (in an asset sale some or all of the sale proceeds are generally taxable at ordinary income rates). In a previous article we illustrated how, compared to a third party asset sale in 2013, selling to an ESOP can increase the after-tax proceeds by over 40%.
If a sale involves a C Corporation, a stock sale to an ESOP may offer you additional tax savings. A C Corporation asset sale may be subject to double taxation since the company pays taxes on the gain on the sale of the asset, and, in addition, the seller pays taxes when a dividend is subsequently paid.