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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.
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