Selling a business is something most people only do once in a lifetime. While there are many ways to structure the sale, it always requires negotiation between the buyer and seller, so both parties walk away satisfied. In addition to accounting for the business’ assets, it’s critical to consider the tax implications of any sales agreement.
To ensure a smooth transaction, it’s important to have a seasoned tax team structuring whatever agreement you decide on.
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Full Transcript
[Steve] Hi, I’m Steve Gallant tax partner at LGA and I’m here with Larry Andler who was one of our pre tax principles. And our topic for this week is selling your business how to structure the sale. Most people only sell their, business one time in their life and there are a lot of motion and planning and um, ways to do it, to sell the business. And one is a stock sale, which is the preferred method for the seller because the seller will then just like capital gains tax, it’ll lower tax rate and the buyer actually wants an asset sale because whatever he pays for the company, he wants to be able to step up the value of the assets and depreciate and amortize them over time. So there’s a conflict in between buyer and seller. So negotiation is, is extremely important.
[Larry] That’s right Steve. In addition, the buyer doesn’t want to acquire any of the kind of bad history of the company or any of the liabilities, including those that may not even be known when they are instructing their transaction. So the buyer is much more prefers to say I want that asset, that asset, not that asset and they don’t acquire the liabilities. Whereas the seller wants a clean break from their business. Therefore they want to do, sell the stock and be able to walk away and kind of go into retirement or whatever the next phase of life is. So it’s important to negotiate, as Steve said, between the buyer and the seller to reach you. Right. That reflects both these preferences and the different tax results for the buyer and the seller because you want to mitigate the effects for both sides.
[Steve] There are some situations that are where, you might not be able to pull off anything but a stock sale.
[Larry] Yeah. So in some cases you have a stock sale required because there are contracts that are transferrable or other agreements and employment, um, employment relationships and things like that that you can’t transfer in an asset sale and easily because the vendor or the, the other party isn’t willing to transfer. So you’re required to do a stock sale so that those assets are transferred as part of the transaction. But there are ways to get around that through the tax code. One of which is allows to, Tom usually have a stock sale that you elect to treat it as an asset sale. It’s called a three 38 H 10 where you basically sell stock but you treat it as an asset sale. The benefits there obviously to the, to the buyer is that they get a step up in basis in the assets and the seller as a stock sale is there’s a clear line and the stock is sold.
[Steve] However, by doing it, agreeing to do the a stock sale, treated as a an asset sale. The seller could end up paying a little bit more tax. So that’s often part of the major part of the negotiation.
[Larry] Its there important to recall these agreements before you signing the contracts and that you’re not dealing with them when you’re filing your tax returns? And it’s part of that you want to have a good team in place to make sure this transition goes smoothly and that you’ve earned retirement and the acquisition on the other side go well.
[Steve] And I think the most important thing, Larry, is to make sure that you put together a well-seasoned tax team to structure and carry the transaction through.
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