When negotiating the sale of a business, one of the first decisions the buyer and seller must agree upon is whether to structure the deal as a stock sale or an asset sale. Assuming the business is incorporated, it has shareholders who own stock (or, in the case of an LLC, members who own units). If the shareholders sell their stock to the buyer, the existing business continues in place unchanged but now under new ownership. Alternatively, if the business itself sells its assets to the buyer, the original corporate entity remains in place with its original shareholders, and it still holds any assets and liabilities that the buyer did not agree to purchase.
What makes sense in one case may not make sense in another. Each transaction is unique. But as a general rule, sellers prefer stock sales and buyers prefer asset sales. If a seller can negotiate a stock sale, he can have greater confidence that the sale proceeds will be taxed as capital gains. He isn’t receiving payment for a crane or for inventory or for work in process. He’s receiving payment for the value of his equity in the business. The IRS taxes capital gains at a lower tax rate than ordinary income, which explains the seller’s preference for a stock sale.
A buyer, however, will normally insist on an asset sale. Under the terms of the agreement, the parties will specify which assets are being transferred and how the purchase price will be allocated among those assets. This arrangement often allows the buyer to depreciate certain assets more rapidly. Also, it prevents unknown, unassumed liabilities from following the buyer. (Why would a buyer want to “buy” the seller’s headaches?)
As I said, each transaction is unique. Creative planning and collaborative negotiation may allow the parties to structure a true “win-win” transaction. For that to happen, both parties need to involve their legal and tax experts and to start planning well in advance. If Wright Beamer can help, contact our office at 248.477.6300.