Buying and Selling a Business – Asset or Equity Sale?
You’ve decided to either sell your current business or buy a new one. You’ve done a business valuation or appraisal to confirm the value of the business, including its assets, goodwill, and related factors. The next step is to determine the purchase price and how to structure the sale.
There are two ways to buy or sell a business: an asset sale and an equity sale. An asset sale is where you buy or sell the individual assets which may or may not include certain liabilities. For example, you might offer to purchase or sell the equipment, inventory, customer contracts, intellectual property, and general goodwill. The other option is to sell or purchase the ownership of the selling entity. In an equity sale, the entirety of the ownership of the business entity, including all of its assets and all of its liabilities, are transferred.
There are several considerations to determine which method is best for each individual business transfer. Tax implications and potential liabilities are the two main factors, but in certain industries, the ability to transfer master service agreements, insurance billing numbers, and related assets are also a key consideration.
For many sellers, a stock sale receives better tax treatment because of the different treatment given to goodwill, taxed at capital gains rates, v. tangible “hard” assets, which are typically taxed at higher ordinary income rates. For buyers, an asset sale may allow you to allocate a higher value for assets that depreciate quickly (ex: equipment) and assign a lower value to assets that depreciate more slowly (ex: goodwill) to help reduce taxes sooner and improve cash flow during the years immediately following the purchase. It is important to secure an accountant familiar with business sales to assist in determining which sales style achieves the best results for your individual situation.
As a buyer in certain industries, you may need to purchase the equity to insure that assets are transferred. For example, frequently, licenses to operate, insurance billing numbers, or Master Service Agreements are not transferrable through an asset sale as they are uniquely tied to the Employer Identification Number assigned by the IRS to the company. In these situations, acquiring the ownership equity in the company is the only way to smoothly transition the assets to the buyer. When purchasing a business in an equity sale, it is vitally important that a buyer conduct a thorough and, perhaps, more detailed due diligence process as an equity purchase includes all the liabilities of the company.
The attorneys at Waldron & Schneider have successfully guided businesses through the purchase and sale process for more than 30 years and would love to assist you in the process.
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