SELLING YOUR BUSINESS

By: Daniel J. Fetter, Esq.



You accepted an offer to sell your business. The buyer has proposed to purchase your company's assets. You are thrilled with the value the buyer has placed on the business and don't pay attention to the transaction structure, i.e., asset vs. stock. As the closing approaches, you begin to discuss how the purchase price will be allocated among those assets sold and suddenly you realize the purchase price was deceiving. 


Deal Structure: Asset vs. Stock Sales


For tax (and non-tax) reasons buyers typically prefer an asset purchase while sellers prefer to sell their stock in the target company.  


Asset Sale


The purchase price allocation is the process in which the buyer and seller assign a value to the assets to be sold. This determines: (1) seller’s income tax liability; (2) buyer’s tax basis in the acquired assets; and (3) how quick the buyer can depreciate or amortize those assets to recognize future income tax savings. Generally speaking, what is good for the seller is bad for the buyer, and vice versa. 


Seller's gain on the sale of assets will result in a combination of capital gains tax rates (up to 20% federal) and ordinary income tax rates (up to 37% federal). In order to keep the tax bill low, seller will prefer to allocate more of the purchase price to goodwill and other intangible property taxed at the lower capital gains rate, which subjects buyer to a 15-year amortization period.


Buyer will prefer to allocate the purchase price among those assets which can be depreciated in the short-term (e.g., vehicles and equipment), which subjects seller to ordinary income tax rates. 

 

An asset sale is the more common deal structure, and if the buyer insists on purchasing assets over stock, then seller may have leverage to negotiate an increased purchase price to account for the higher tax bill.  


Stock Sale 


If selling stock of the target company only, no purchase price allocation is needed. Seller’s gain on the sale of stock is taxed at the capital gains tax rate. Buyer loses the ability to step up the tax basis in the acquired assets and assumes the target company's depreciation history. If the company's assets are fully depreciated, buyer receives no future tax savings.


Be mindful of the deal structure and do not wait until the 11th hour to negotiate the purchase price allocation. 


   

Contact Our Business Attorney in Syracuse, NY

   

If you’re ready to sell your business, make sure you get the legal help and guidance you need from the legal team at Scolaro Fetter Grizanti & McGough, P.C. Our experienced team can help explain the process of a business sale to you and oversee everything involving your transaction. We provide expert counsel for business clients, dealing with complex cases like a business sale. Scolaro Fetter Grizanti & McGough, P.C. is a trusted business attorney you can count on in Syracuse, NY to navigate the complex tax laws surrounding a business transfer. Consult with a business contract attorney in Syracuse, NY to make sure you can resolve any potential legal disputes or pitfalls during the business sale process. Contact Scolaro Fetter Grizanti & McGough, P.C. today to assist your business in Syracuse, NY and throughout New York State.
 

This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.


This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.

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