To Structure The Sale Of A Small 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 Not To Compete etc.) .
Difference Between An "Asset Sale"
And An "Entity Sale"
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"
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 the sale.
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
addition to liability concerns, there 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 to pursue.
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 assets.
Tangible And Intangible Assets That Make Up
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 on them?
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,
Real estate (land, buildings, leases)
rights to occupy leased property
contracts with suppliers
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 income.
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
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
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
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
on your situation, you may save more
in taxes than the amount you reduce the selling
this is one area where you will rely on your
account for guidance throughout.