Asset Sale Value

When valuing the entire company (100% control interest), it is typically necessary to
distinguish between the value of “assets” (asset sale) and the value of “equity” (stock
sale). In practice, owner-operated businesses are either sold on an “asset sale basis” or on a
“stock sale” basis with the purchase agreement reflecting the unique aspects of each scenario.
A variety of factors will determine the chosen mode of sale, with buyer and seller negotiating
price and an array of other “terms and conditions” including the type of sale. Other “value
types” exist such as enterprise value and liquidation value, but it is the asset sale and
equity sale framework which accompanies actual business transactions.

The majority of smaller, owner-operated private firms are sold as asset sales while the
majority of middle-market transactions involve the sale of equity. The “asset sale” value
will always differ from the “stock sale” value due to the specific group of assets and liabilities
that are included or excluded in each format.

Business brokers and owners most commonly value businesses under the “asset sale”
scenario through multiples of discretionary earnings while valuations for divorce or estate
taxes or a middle-market merger will typically be based on the “equity sale” scenario.
In general, the goals of the buyer and seller are typically at odds with respect to the choice of
deal structure. The rationale for selecting one over the other is complex and worthy of legal and
tax advice.

The seller typically prefers a “stock sale” due to application of capital gains tax (sale price
versus current “basis” in stock) rather than combination of capital gains and higher ordinary
income tax rates. The buyer typically prefers an “asset sale” due to the avoidance of
liabilities (known and unknown) and the ability to re-depreciate the fixed assets based on the
“allocation of purchase price” per IRS Form 8594.

In some cases, licenses, contracts, or other key rights that belong to the corporation and
cannot be easily transferred will dictate the use of a stock sale so that key rights remain
with the new owner. For example, a corporation with a hard to obtain FDA license would likely
be structured as a stock sale so that the FDA license is maintained by the corporation and
transferred to the new owner(s).


The general differences between the asset and equity transaction structure are summarized
next.

Asset Sale Value
Includes ONLY inventory/supplies, fixed assets (furniture, fixtures and equipment) and all
intangible assets (goodwill, customer base, tradename, covenant not to compete, etc.).
Excludes all liquid financial assets and all liabilities. Buyer operates from newly formed legal
entity.

It is calculated as a “multiple” of discretionary earnings or of revenues, e.g. 3 times discretionary
earnings and is equal to:

Asset Sale Value
Value of Inventory PLUS Value of F,F&E PLUS Value of Intangibles