In a previous article, we talked about setting realistic expectations for selling your business, including timetable, price and fees. When thinking about selling your business, you'll also need to consider things like transaction type, asset sale, stock sale, and sales channel, among other things.
When structuring your business for sale, a designation must be made about whether your company will be structured and sold as an asset deleted or as a stock sale. This decision could be a complicated one because whichever is selected will be positive for one party but negative for the other. An asset sale is the sale of a company's assets deleted; a stock sale is the sale of shares in a corporation. Tax issues and liabilities may complicate the designation and the sale.
An asset sale must be conducted for a sole proprietorship or a partnership because these business structures do not have stock. A limited liability company (LLC) can sell its membership units. If there are multiple owners, as in a partnership or LLC, one or more owners could elect to sell their partnership interests instead of the business's assets. If, however, the business is a C corporation or an S corporation, there is a choice of selecting an asset or stock sale.
Assets are the tangible and intangible property elements of a business such as inventory, equipment, licenses, patents, trade names, etc. In an asset sale, the buyer buys the assets while the debt and other liabilities remain with the seller. This is pleasing to the buyer because the focus can remain on the market value of the assets. There are also tax benefits for the buyer with depreciation, which improves cash flow in the initial years after the sale. Of course, there can be complications for the buyer as well because some assets, such as intellectual property, leases, contracts, etc. may be difficult to transfer because of legal obligations.
The seller experiences difficulty because, among other issues, an asset sale can create higher taxes, and in the case of a C corporation, the issue of double taxation can become a serious and costly negative. Obviously the advice of your professional team is warranted.
With a stock sale, the buyer is acquiring the seller's shareholder stock; assets and liabilities that are unwanted by the buyer will be sold or paid off prior to the transfer of the business's title. Because shares are exchanging hands, individual company assets do not have to be named in the sale.
Buyers do not gain the depreciation advantage they would normally have in an asset sale, which may result in more taxes in the future. In addition, buyers receive the company's liabilities, known or unknown, for such categories as OSHA violations, employee matters, lawsuits that may materialize, etc. Special language in the sale agreement can mitigate risk in this area, and would be a wise addition for the buyer.
Sellers tend to prefer stock sales because they benefit from reduced taxation, and in the case of a C corporation, the double taxation is avoided.
As always, these are serious considerations that should be discussed with your professional advisors so you have all the information you need to proceed with confidence and full knowledge.
After a decision has been made about whether this sale will be an asset sale or a stock sale, the next decision is determining which sales channels are best for telling the market the good news that your business is for sale. Depending on the advice of your professional team, marketing could be on websites that specialize in business sales, or perhaps private equity groups (PEGs) will be approached. Your broker will have a strong idea of what channels are best for your business, and the market contacts to distribute the news.
In our next article in this series, we'll discuss desired price range and process review. In the meantime, if you have questions, we encourage you to talk to your business broker, your investment manager and other members of your business and financial planning team.
Selling a business is a complex transaction that often requires a skilled broker like Joseph M. Maas of Synergetic Finance in Seattle. For additional info., visit Synergetic Finance online or check out Maas' new book Exit Insight: Getting to Sold, available at Merrell Publishing.