By Niv Buzzetta, CBI, CM&AP
 
There are many factors to consider when structuring a business sale including the amount and type of financing, roll-over equity for a seller, employment and consulting agreements, holdbacks and contingent payments, target working capital, and tax implications to name a few. A primary factor is selecting whether to structure the business sale as an asset sale or a stock sale.

The following is a general description and the key advantages of each structure.

In an asset sale, a seller remains the legal owner of the business entity post-transaction and a buyer purchases specific assets of the business, including tangible assets, such as furniture, fixtures, equipment, and inventory, as well as intangible assets, such as goodwill, phone numbers, non-compete agreements, and customer lists.  The advantages of an asset sale include:

1. Tax Advantages - A buyer can step-up the basis value of both tangible and intangible assets for higher depreciation and amortization deductions post-transaction. In addition, goodwill can be amortized on a straight-line basis.
2. Selective Transfer of Assets and Liabilities - A buyer can choose to purchase the profitable assets of the business and limit risks by excluding assets that do not add value. A buyer also has the option of selecting liabilities from the acquisition limiting their exposure to any debt, warranty, or other liabilities incurred by a seller.
3. Simplified Due Diligence - Since exposure to unknown liabilities is limited, a buyer spends less time, money, and resources conducting a comprehensive due diligence.
4. Flexibility in Restructuring the Business - A buyer can create a new corporate entity or absorb the assets into an existing corporate entity.
   
   

In a stock sale, a buyer purchases the stock of the business; this includes all the assets and liabilities.  The advantages of a stock sale include:

1. Tax Advantages - A seller will realize the gain on the sale of stock at the preferred capital gains tax rate instead of the seller’s ordinary income tax rate. The Federal capital gains tax rates are 4% lower than the highest income tax bracket rate.
2. Simplicity of Transaction - A buyer obtains ownership by purchasing the business’s stock. This is less complicated than having to select the specific assets and liabilities of the business to purchase.
3. Flexibility - A buyer gains the flexibility of being able to purchase all or just a percentage of the business. If all shares of stock are not purchased, the remaining shares can be sold to additional investors or be used to ensure a vested interest in a smooth transition by the primary shareholder(s) and/or key employee(s). 
4. Ease of Contract Transfers - A buyer will assume the existing licenses, leases, insurance, vendors, and customer contracts eliminating the time and risk of transferring them to a new entity. A stock sale is more appropriate if vendor agreements and/or customer contracts are a significant component of the business.
5. Continuity of Business - A buyer can continue operating the business “as is” as there is minimal disruption to the business. Employees, customers, vendors, and other stakeholders will not have to contend with major changes to operations.
   
   

Selecting between an asset sale and a stock sale will have a different set of advantages and complications for both a buyer and a seller. Each party should consult with their tax preparer and attorney for tax implications and legal considerations.

If you are interested in learning more about the advantages of asset sales and/or stock sales, contact Niv Buzzetta at 239.596.8776 or [email protected] for a more comprehensive discussion.