Asset versus Stock Sale

by | Dec 2, 2010 | Exit Planning Strategy | 0 comments

selling a software business, asset sale or stock sale

Selling a Software or Technology Business: Asset Sale, Stock Sale, or 338(h)(10) Election?

Introduction

Selling a software or technology company can be a complex and challenging process. One of the key decisions that business owners need to make is whether to structure the sale as an asset sale, a stock sale, or a stock sale recognized as an asset sale in a 338(h)(10) election. In this article, we explore the differences between these three types of sales and the key factors that software and technology business owners should consider when deciding which type of sale is best for them.

Asset Sale

In an asset sale, the buyer purchases the assets of the business, such as its intellectual property, equipment, and inventory. The buyer does not acquire the stock of the company, and as a result, the seller retains ownership of the legal entity that owned the assets. The main advantages of an asset sale are that the seller can allocate the purchase price among the assets being sold, and the seller can retain any liabilities associated with the legal entity that owned the assets.

For software and technology businesses, asset sales can be complex because the most valuable assets of the business are often its intellectual property, which can be difficult to transfer in an asset sale. In addition, asset sales may require the consent of third parties, such as customers or licensors, and may trigger tax consequences for the seller.

Stock Sale

In a stock sale, the buyer purchases the stock of the company, and as a result, acquires ownership of the legal entity that owns the assets of the business. The main advantage of a stock sale is that it is generally simpler and less expensive than an asset sale, as it does not require the transfer of individual assets. In addition, stock sales can be advantageous for the buyer, as they may allow the buyer to avoid any transfer taxes or fees associated with an asset sale.

However, for software and technology businesses, stock sales may present challenges because the buyer is assuming all liabilities of the company, including any unknown liabilities. In addition, stock sales can be complex because they may require the consent of third parties, such as customers or licensors, and may trigger tax consequences for the seller.

338(h)(10) Election

A 338(h)(10) election is a special type of stock sale that is treated as an asset sale for tax purposes. In a 338(h)(10) election, the buyer purchases the stock of the company, but the transaction is treated as an asset sale for tax purposes. This allows the buyer to obtain a step-up in tax basis for the assets being acquired, which can result in significant tax savings for the buyer. In addition, the seller can allocate the purchase price among the assets being sold and can retain any liabilities associated with the legal entity that owned the assets.

For software and technology businesses, 338(h)(10) elections can be attractive because they offer the benefits of both asset sales and stock sales. However, 338(h)(10) elections can be complex and require specific tax expertise to execute properly. In addition, 338(h)(10) elections may not be appropriate for every software or technology business, as they may not provide the best tax benefits for certain types of assets.

Key Factors to Consider

When deciding which type of sale is best for a software or technology business, there are several key factors that business owners should consider:

  • Tax Consequences: The tax consequences of the sale can vary significantly depending on the type of sale. Business owners should consult with tax advisors to determine which type of sale will provide the most favorable tax treatment for their specific situation.
  • Liability: The liability associated with the sale can also vary depending on the type of sale. Business owners should consider the risks associated with retaining ownership of the legal entity that owned the assets, as well as the risks associated with transferring all liabilities to the buyer.
  • Asset Transfer: The transfer of assets can be complex and may require the consent of third parties, such as customers or licensors. Business owners should consider the ease and cost of transferring assets when deciding which type of sale is best for them.
  • Purchase Price Allocation: The allocation of the purchase price among the assets being sold can also vary depending on the type of sale. Business owners should consider how they want to allocate the purchase price among the assets being sold and whether the chosen sale structure will allow them to achieve their desired allocation.
  • Simplicity and Cost: The simplicity and cost of the sale can also vary depending on the type of sale. Business owners should consider the ease and cost of executing the sale when deciding which type of sale is best for them.

Conclusion

When selling a software or technology business, business owners must decide whether to structure the sale as an asset sale, a stock sale, or a stock sale recognized as an asset sale in a 338(h)(10) election. Each type of sale has its advantages and disadvantages, and the best choice will depend on the specific needs and goals of the parties involved.

By considering the key factors discussed in this article, software and technology business owners can make an informed decision about which type of sale is best for them. Ultimately, the choice of sale structure will depend on a variety of factors, including tax consequences, liability, asset transfer, purchase price allocation, simplicity, and cost.