There are a number of factors to consider when buying or selling a business. The tax factors are many, but those that often dictate how to structure the deal can be distilled down to the following:
- Is the deal going to be taxable or tax-free.
- If taxable, is it a stock or asset sale.
- When will payment be made and how.
Taxable or Tax-Free Deals
Tax-free deals typically involve exchanges. The seller exchanges their interest for equity in another entity. The other entity is usually larger and controlled by the buyer. For the seller, this raises questions about control, confidence in the new entity, and whether the new entity is transferrable and liquid (as with public company stock) or illiquid.
While the term “tax-free” has a nice sound to it, the drawbacks given the above-listed considerations may not outway the tax liability. This is why most deals are taxable. In some cases, the tax liability is not that large. The availability of lower capital gains rates, Section 1202 stock, or corporations with high basis or net operating losses are examples where the taxable deal may not trigger all that much in tax.
Stock or Asset Sale
The more difficult question is whether the deal should be structured as a stock or asset sale. The general rule that the seller prefers a stock sale and the buyer prefers an asset sale is usually the starting point. The seller may prefer the stock sale to get capital gains rates. The buyer may prefer an asset sale to get a stepped-up basis (and faster depreciation deductions) or to avoid liabilities or unknowns about the business.
The tax cost or savings can be modeled given time value of money considerations and this can factor into the amount of the sales price and payment terms. In an ideal transaction, the parties would work together to minimize the tax to the detriment of the IRS and state tax authorities.
With that said, most transactions are asset deals. Buyers have the money, so they often control the terms of the deal. Our tax laws provide middle grounds where a stock sale can be treated as an asset sale. These options can help minimize the amount of tax that gets paid.
Timing & Manner of Payment
The seller may want to get paid in cash and immediately. This is especially true if the seller needs money to fund another business, to pay off debt, or some other short-term need. The seller may accept a lower sales price if the payment terms are in its favor.
Conversely, the buyer may prefer to pay in equity or other property and pay later. The buyer may be willing to pay more for the business if the payment terms are favorable.
This is often not an all-or-nothing proposition. The deal may call for some upfront cash payments, some equity payments, and some payments over time.
Get Help With Your Deal
We help structure business transactions and with mergers, acquisitions and sales. If you have a business that you are trying to acquire or sale, we want to hear from you. Please give us a call to see how we can help.