American Association of Insurance Management Consultants

Basic Asset Sale for an Agency

Summary: 

Will it be an “ASSET” sale or a “STOCK” sale? The first (and most fundamental) question when structuring either an internal or external transition of any agency, is whether it will be structured as an “asset” sale or a “stock” sale. Since most agencies are either corporations, or LLCs taxed as a corporation, this discussion will refer to corporations. If your agency is a sole proprietorship or partnership, your situation will be similar to an “S” corporation.

Full article: 

Chapter 6 - Basic Asset Sale for an Agency

Will it be an “ASSET” sale or a “STOCK” sale? The first (and most fundamental) question when structuring either an internal or external transition of any agency, is whether it will be structured as an “asset” sale or a “stock” sale. Since most agencies are either corporations, or LLCs taxed as a corporation, this discussion will refer to corporations. If your agency is a sole proprietorship or partnership, your situation will be similar to an “S” corporation.

Most sales are structured as an “asset” sale.  In some cases a “stock” sale is more appropriate, although the parties to the sale may not realize this.

There are major legal and tax issues involved, and they impact the buyer and the seller differently. The difference can be profound, with major operational, legal and tax ramifications.

This fundamental decision can become a highly contentious difference between what the buyer and the seller want in the sale!

Buyers:  Although it will not always be the case, buyers will usually prefer an “asset” sale structure.

An “asset” sale exposes the buyer to less potential carry-over legal liability than a stock sale, so the starting point recommendation from most attorneys representing the buyer will be an asset sale. The tax effects in an “asset” sale also tend to favor the buyer compared to a stock sale, so most CPA’s for the buyer will also favor an asset sale.  Accounting rules for publicly traded corporations favor “asset” sales, so big national buyers favor asset sales.  

Although the starting point for most attorneys will be to favor an “asset” sale, the legal issues are complex and varied.  There is much more involved than just potential carry-over liability, and other issues can sometimes favor a stock sale instead of an asset sale. For instance, favorable contracts of all kinds are often much easier to preserve in a stock sale.  Legal issues are covered in more detail in other chapters.

Sellers:  The decision is not as clear-cut on the seller’s side of the table. In some cases, taxes on the seller will be essentially the same regardless of whether a sale is structured as an “asset” sale or a “stock” sale. In these cases, the seller is usually neutral between an “asset” and a “stock” sale.  

In some cases the seller will be taxed much more heavily in an “asset” sale. In these cases sellers will strongly prefer a “stock” sale. The extra tax can be so high that it will actually kill the deal unless either the sale is structured as a “stock” sale, or some other way can be found to reduce the tax.  

There are various ways to mitigate the tax damage; all of which add complexity, and none of which completely eliminate the problem. The simplest solution is to mutually agree to a “stock” sale. The disadvantages to the buyer can be offset by a reduced price.

An overview of the tax issues is provided at the end of this chapter. Ways to potentially mitigate the damage are covered in other chapters.

Read more about the Basic Steps in an Asset Sale