General Types Transaction Structures. There are three general types of transaction structure for a privately held business.:
- Asset Sale:: the purchase of the assets of the business
- Stock Sale:: the purchase of the stock of the company owning the assets
- A Merger: the acquiring company and target company effectively become one entity
It is possible to combine the different types to create a hybrid transaction structure, such as some of the assets of the business are purchased separately from the stock of the company that owns the remainder of the assets, and a merger immediately occurs between the Buyer and the acquired company thereafter. Another example could involve the purchase of the stock of one company and the assets on another, where both Companies are actually owned by the same Seller. The possibilities are nearly endless.
Questions that a Seller should Ask. The foundation of a transaction usually revolves around key issues that affect the structure:
- What price and at what terms will the Buyer acquire?
- What are the tax ramifications to the Buyer and seller?
- What are the long term goals and objectives of the Buyer?
- What is the role of the Seller in the business after closing?
- Which assets are included in the sale and at what value?
- Which liabilities will be assumed by the Buyer, if any?
- How will tangible and intangible assets be transferred to the Buyer?
- Will the Buyer acquire the assets or stock of the acquired company?
- What form or forms of payment will be made to the Seller at closing?
- Will the price be fixed, contingent, or payable over time?
- What are the tax consequences of the proposed structure for the purchase?
Asset Transaction. In an asset transaction the acquired company transfers all the assets used in the business. These Assets can include equipment, inventory, and real estate, along with “intangible” assets such as contract rights, leases, patents, and trademarks.
Seller's Advantages in an Asset Transaction
- Ownership of nontransferable assets are usually retained;
- Specific assets can be carved out of the transaction.
- Corporate name and goodwill can generally be maintained;
- Seller retains corporate entity after the sale;
- Corporations tax attributes are retained.
Buyer's Advantages in an Asset Transaction
- The Buyer can be selective as to which assets of the company are acquired;
- Seller liabilities generally remain with the seller’s corporate entity, unless specifically assumed under the contract;
- Undisclosed or contingent liabilities generally remain with the Seller’s corporate entity;
- Opportunity to elect new accounting methods;
- Asset value is stepped up to market value and equal to the purchase price, allowing higher depreciation and amortization expenses, resulting in income tax savings.
Stock Transaction. The Seller transfers its shares in the acquired corporation to the acquirer in return for an agreed purchase price. Although, the acquirer may purchase less than all the stock in a public company, this seldom occurs in the purchase of a privately held business.
Seller's Advantages in a Stock Sale
- Taxes are only on the sale of stock, generally a tax benefit to the Seller;
All obligations (i.e.disclosed, not disclosed, unknown, and contingent) and nontransferable rights can be transferred to Buyer;
Gain or loss is usually capital in nature... If stock held by individuals is IRC Section 1244 stock and is sold at a loss, the loss;
Proceeds are generally treated as ordinary income;
May permit Seller to report gains from the sale of stock on an installment basis;
Does not leave the Seller with the problem of disposing assets that are not bought by the purchaser.
Buyer's Advantages in a Stock Sale
- Tax attributes carry over to Buyer (e.g., net operating loss and credit carry forwards)
- Avoids many of the restrictions imposed on sales of assets in loan agreements and potential sales tax
- Preserves the right of the buyer to use the Seller’s name, licenses, and permits
- No changes in the corporation’s liability, unemployment, or workers’ compensation insurance ratings
- Nontransferable rights or assets (e.g., license, franchise, patent) can usually be retained by the Buyer
- Continuity of the corporate identity, contracts, and structure
Seller's Disadvantages in a Stock Transaction
- Possible double taxation if the corporation also liquidates;
- Generates various kinds of gains or loss to the Seller based on the classification of each asset as capital or ordinary;
- Transaction more complex and costly in terms of transferring specific assets or liabilities;
- A variety of third-party consents will typically be required to transfer key tangible and intangible assets to the Buyer;
- Offer and sale of the company’s securities may need to be registered under certain circumstances;
Seller cannot pick and choose assets to be retained;
May not use the corporation’s net operating loss and credit carry forwards to offset gain on sale;
Loss on sale of stock may not be recognized by corporate shareholder who included the company in his consolidated income tax returns.
Buyer's Disadvantages in a Stock Transaction
- No carry over of the Seller corporations tax attributes such as credit carry forwards and net operating losses;
- A bargain purchase could cause a step down in the basis of the assets;
- Nontransferable rights or assets cannot be transferred to the Buyer;
- Lenders consent may be required to assume liabilities;
- Loss of corporations liability, unemployment, or workman’s compensation insurance rates;
- There is less flexibility to cherry-pick key assets of the Seller;
- The Buyer may be liable for unknown, undisclosed, or contingent liabilities (unless adequately protected in the purchase agreement);
- No step-up in basis (i.e., seller’s depreciation basis is preserved and the Buyer continues with historical tax basis);
- Normally does not terminate existing labor union collective bargaining agreements or employment agreements and generally results in the continuation of employee benefit plans;
- Dissenting shareholders have a right of appraisal for the value of their shares, with the right to be paid the appraised value,for the remaining minority shareholders.
For more information Neri Capital's proven methods to achieve a seller's objectives in Buyer Representation, call 1-800-216-4819 x701 or x702 or contact us.