Sell
Your Business
How
To Structure A Sale When You Sell Your Business
Below
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.) .
The
Two Types Of Sales: Asset Sale And Entity Sale
There
are two different 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).
If
your company is a single proprietorship the sale will always
be an asset sale.
If
you company is an LLC or corporation, you have the choice
of either approach.
Most
buyers 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.
However,
even with an entity sale the buyer may try to negotiate
to have certain 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
of sale.
In
addition to liability concerns, their are significant differences
between the two types of sales when it comes to taxes. So
you will certainly want to talk with your CPA and attorney
when deciding what type of sale you will pursue.
Please
Note:The
term "Assets Sale" as I've used it above only
refers to the legal structure of the sale. Later,
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. The question
of whether you pursue an asset sale or an entity
sale should not be confused with a discussion of your
company's assets.
Tangible And Intangible Assets
While
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?
The
computer that sits on your desk?
How
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?
Some
assets that may be included in the sale are:
Tangible
Assets
•Furniture,
fixtures, and equipment (including cars, truck, forklifts,
computers and printers etc.)
•
Inventory (finished goods, works in progress, raw materials)
•
Real estate (land, buildings, leases)
Intangible
Assets
•Copyrights
and patents
•Trademarks
•Transferable
rights to occupy leased property
•Accounts
receivable
•Favorable
contracts with suppliers
•Goodwill
Asset
Allocation
In
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.
Therefore,
your tax bill may be dramatically affected by how the assets
are allocated within the sale.
Usually,
w hat lowers your taxes will raise the tax bill for the
buyer.
For
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.
However,
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.
On
the other hand, the amount your are paid for inventory is
viewed as regular income and therefore will be taxed at
a higher rate than the long term capital gains rate you
pay on the goodwill. 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.
So
in addition to the overall selling price, you and the buyer
must negotiate the percentage of the selling price that
is attributable to each type of asset that is included as
part of the sale.
This
may seem to hopelessly complicate the sales process, but
in fact it can help to make the negotiation process more
successful.
For
example, let's assume that you and the buyer can't come
to an agreement on the selling 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: depending
on your situation, you may save more in taxes than the amount
you reduce the selling price.
Obviously,
this is one area where you must lean on your account for
guidance throughout.
