To Structure The Sale Of A Business
we will cover the two types of sales ("Asset
Sale" Vs "Entity Sale"), the tangible
and intangible assets that may be included in the
sale, and the different agreements that can be part
of a sale of a business( consulting contracts, Covenant
No To Compete etc.) .
Difference Between An "Asset Sale" And An
are two basic ways to sell your business: You can
sell the buyer some or or all of your company's assets
(the "Asset Sale" method) or you can sell
the buyer your corporation or LLC that owns the assets
(the "Entity Sale" method).
your company is a single proprietorship the sale will
always be an asset sale.
you company is an LLC or corporation, you have the
choice of either approach.
buyers will want the sale to be an an asset sale because
it limits their liability. When the buyer purchases
your entity they become responsible for any of your
liabilities (debts, legal claims etc.). With an asset
sale, they are just buying the specific assets listed
in the sales contract.
in a business sale everything is negotiable,
so even with an entity sale the buyer may try to negotiate
to have specific assets or liabilities removed from
as the seller, you can choose to have any assets you
want to keep removed from the sale. Accounts
receivable, for example, are often retained by the
seller regardless of the type of sale.
addition to liability concerns, their are big differences
between the two types of sales when it comes to taxes.
So you definitely want to consult with your CPA and
attorney when deciding what type of sale you want
term "Assets Sale" as used in the above
section refers to the legal structure of the
sale. Below we will talk a lot about the assets that
make up a business. So when we use the word "asset"
below, we are talking about all the things of value
that the company owns such as real estate, inventory,
equipment etc. So the question of whether you pursue
an "Asset Sale" or an "Entity Sale"
should not be confused with a discussion of the company's
Tangible And Intangible Assets That Make Up The Sale
there are big tax and legal differences between
the two types of sale structures, one thing that is
the same in both is that you and the buyer have to
agree on exactly what assets and liabilities
are to be included in the sale.
Do you want to keep your company car?
computer that sits on your desk?
about the accounts receivable? Do you want to take
them with you or will you add their value to
the asking price and let the buyer try to collect
assets that may be included in the sale are:
fixtures, and equipment (including cars, truck, forklifts,
computers and printers etc.)
Inventory (finished goods, works in progress, raw
Real estate (land, buildings, leases)
rights to occupy leased property
contracts with suppliers
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an "Asset Sale", your profit from certain
assets will be taxed as long term capital gains yet
other profits will be viewed by the IRS as regular
your tax bill may be dramatically affected
by how the assets are allocated within the sale.
often, what lowers your tax bill will raise the taxes
of the buyer.
example, the amount that the buyer pays you for Goodwill
is considered a long term capital gain (as
of this writing long term capital gains are taxed
at 15%). So the more the buyer pays you for goodwill,
the better for you.
the buyer must amortize the amount he paid
for good will over 15 years - and that is not good
for him when it comes to lowering his taxes.
the other hand, the amount your are paid for inventory
is viewed as regular income (and therefore a higher
tax rate than the long term capital gains rate
you pay on the goodwill). So obviously you would like
the percentage of the selling price allocated to inventory
to be as small as possible. But the buyer,
who can expense inventory off as soon as it is sold,
would like to see a high figure allocated toward inventory.
in addition to the overall selling price, you and
the buyer will need to negotiate the percentage
of the selling price that is attributable to each
type of asset that is included in the sale.
may seem to hopelessly complicate the sales process,
but in fact it can help to make the
negotiation process more successful.
say, for example, that you and the buyer are at loggerheads
over the price - he doesn't want to increase his final
offer and you don't want to come down anymore than
you already have. You could offer to reduce the price
to meet his demands in exchange for shifting
more of the selling price from inventory to goodwill.
on your situation, you may save more in taxes
than the amount you reduce the selling price.
this is one area where you will rely on your account
for guidance throughout.