Sellers beware! A poorly structured business deal can eat up half of the proceeds of a sale. Professional assistance is essential when crafting the deal, which includes selecting the right sale agreement.
Even after a general agreement is reached, determining the purchase price of your business isn’t as straightforward as it may seem.
The purchase price can be allocated into various tangible assets and/or intangible assets and liabilities. All of these have tax implications for the seller and buyer. It’s important to select the appropriate type of agreement, especially if you want to maximize profits.
The basic types of sale agreements are stock sales, mergers, and asset sales. Each type affects the sell-side and the buy-side of a deal.
Stock sale
In this agreement, the buyer purchases the stock or equity in the seller’s legal entity. Usually, sellers prefer this type of sale because the proceeds are typically taxed at a lower rate.
Asset sale
The buyer purchases certain assets and might assume some of the liabilities of the company, but not the equity. This gives the buyer the benefit of depreciating assets and amortizing costs to improve the company’s taxable earnings after the transaction.
It also helps buyers avoid inheriting problems such as product liability, contract disputes, warranty issues, and employee lawsuits.
Merger
In a merger, the directors of two companies approve the combination and ask for shareholder approval.
The word merger is a misnomer. Once the deal is complete, the acquired company ceases to exist. It’s actually a true acquisition.
Whether selling your business to a family member or an external buyer, the IRS endorses arms-length negotiations. Third parties handle the negotiations between buyers and sellers. This ensures that both parties are acting in their own self-interest and no individual is subject to extreme pressure or duress.
Have questions about choosing a sale agreement? Let’s talk!
