|
Decision for Buyers & Sellers
A Stock Purchase or an Asset Purchase?
If you are just beginning to consider buying or selling a
business, you may not be familiar with the terms used by
brokers, attorneys or accountants in this process. We will
cover more terms in future newsletters, but let’s start with a
basic one, deal structure. You should consult with
us and your attorney or accountant for a more extensive
explanation.
In buying
/ selling a business there are two basic structures for the
transaction: an Asset Purchase or a Stock Purchase.
If the seller has a sole proprietorship, then only an Asset
Purchase can occur.
In an
Asset Purchase certain assets are purchased out of the seller’s
corporation or LLC. The money paid for these assets (this
could, and normally does, include goodwill) is paid into the
seller’s corporation (or LLC). Normally the buyer (company
or individual) does not assume the seller’s debt (but they could
if it is agreed upon). Most Asset Purchases are made with
all assets (in the deal) purchased free and clear of liens, debt
and liabilities.
In a Stock
Purchase the buyer is actually buying the stock of the seller’s
corporation (or LLC). The buyer pays the shareholders for
their stock, and receives all assets and liabilities in
the corporation (assuming the purchase is for all of the stock;
less than 100% of the stock can be purchased).
The
overwhelming majority of small to mid-market transactions are
structured as “Asset Purchases”. Stock transactions may
occur when the seller’s corporation is a “C-Corp” because of the
tax burden that may face the seller (double taxation). As a
rule-of-thumb, if the seller has an S-Corp or LLC almost all
transactions will be structured as Asset Purchases.
There is a
hybrid of these two methods (using a “stepped-up basis”) that in
unique situations should be considered but won’t be covered
here.
There are
a number of advantages and disadvantages to both the buyer and
seller on the structure agreed upon. Some of the more
important considerations in selecting the structure are:
In an
Asset Purchase, generally the buyer does not have to worry about
the seller’s liabilities incurred prior to closing (debts
are normally paid off at closing and any contingent
liabilities follow the seller’s corporation or LLC). This is
probably the number one reason for a purchase to be structured
this way; also the buyer is able to depreciate or amortize the
purchase price (including goodwill) over a period of years,
saving taxes. From the seller’s standpoint the goodwill
portion of the selling price will be treated as LT capital
gains, so from a tax standpoint there will likely be little
difference to the seller.
There are
many other aspects in structuring a deal, including the
allocation of the purchase price; depreciation recapture; rep’s
& warranties; personal guarantees; etc. Expert advice is
needed in these areas.
In our
next newsletter we will cover terms like EBDIT (Earnings Before
Depreciation, Interest, Taxes) and ACF (Adjusted Cash Flow, also
called seller’s discretionary cash); how and why these are used
in selling companies.
|
