Ways to Structure Business Sale
Explore the two common ways - equity sale and asset sale - to structure the sale of a business, along with the assets involved, advantages/disadvantages of stock transactions, and more.
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Presentation Transcript
The Sale/Purchase of a Business Brian Rogers Blue Maven Law, LLC St. Louis, Missouri Presented to IBBA Mid-America February 8, 2022
Two Common Ways to Structure the Sale of a Business Equity Sale and Asset Sale
Whats a Business? Assets Equipment Real estate Inventory Intangibles (brand, trademarks, etc.) Accounts Receivable Liabilities Bank debt Payroll Accounts payable Taxes
Shareholders Cash Buyer Target Pre-Transaction Diagram
Advantages and Disadvantages of Stock Transactions
Advantages of a stock sale Ease of transfer
Advantages of a stock sale Ease of transfer Avoids double taxation for seller
Advantages of a stock sale Ease of transfer Avoids double taxation for seller Seller likely pays capital gains tax on the sale
Advantages of a stock sale Ease of transfer Avoids double taxation for seller Seller likely pays capital gains tax on the sale Less likely to need to create an acquisition vehicle
Advantages of a stock sale Ease of transfer Avoids double taxation for seller Seller likely pays capital gains tax on the sale Less likely to need to create an acquisition vehicle Generally doesn t require an assignment of contracts and permits
Sidebar: Change of Control Provisions Definition of assignment in anti- assignment provision might include change of control Some contracts have a separate provision triggering a default in the event of a change of control o bank credit agreements o distribution agreements o commercial leases
Advantages of a stock sale Ease of transfer Avoids double taxation for seller Seller likely pays capital gains tax on the sale Less likely to need to create an acquisition vehicle Generally doesn t require an assignment of contracts and permits Might be the only alternative if permits or licenses aren t transferable
Advantages of a stock sale Doesn t trigger sales tax on assets or taxes on the transfer of real property
Disadvantages of a stock sale It s all or nothing (can t transfer part of the business)
Disadvantages of a stock sale It s all or nothing (can t transfer part of the business) Buyer takes all of the target s liabilities at least indirectly
Disadvantages of a stock sale It s all or nothing (can t transfer part of the business) Buyer takes all of the target s liabilities at least indirectly Buyer doesn t get a stepped-up basis
Disadvantages of a stock sale It s all or nothing (can t transfer part of the business) Buyer takes all of the target s liabilities at least indirectly Buyer doesn t get a stepped-up basis Issues with ownership/documentation are a bigger deal
Disadvantages of a stock sale It s all or nothing (can t transfer part of the business) Buyer takes all of the target s liabilities at least indirectly Buyer doesn t get a stepped-up basis Issues with ownership/documentation are a bigger deal Holdouts could be a problem
Advantages and Disadvantages of Asset Transactions
Advantages of Asset Sale Easier to purchase only a portion of the business
Advantages of Asset Sale Easier to purchase only a portion of the business Buyer can leave liabilities with the seller
Advantages of Asset Sale Easier to purchase only a portion of the business Buyer can leave liabilities with the seller Buyer gets a stepped-up basis in purchased assets
Disadvantages of Asset Sales Transfer of assets to buyer is more complicated
Disadvantages of Asset Sales Transfer of assets to buyer is more complicated Generally must form an acquisition vehicle
Disadvantages of Asset Sales Transfer of assets to buyer is more complicated Generally must form an acquisition vehicle Seller remains primarily liable under assigned contracts
Disadvantages of Asset Sales Transfer of assets to buyer is more complicated Generally must form an acquisition vehicle Seller remains primarily liable under assigned contracts Getting assignments of contracts can be time- consuming and expensive
Disadvantages of Asset Sales Transfer of assets to buyer is more complicated Generally must form an acquisition vehicle Seller remains primarily liable under assigned contracts Getting assignments of contracts can be time- consuming and expensive Counter-party might be opportunistic and look for a windfall such as payment for consent
Disadvantages of Asset Sales Opportunity for counter-party to adjust a disadvantageous contract
Disadvantages of Asset Sales Opportunity for counter-party to adjust a disadvantageous contract Some states (e.g., New York) impose sales taxes even in an M&A context
Sidebar: Tax Issues in an Asset Sale Sales of tangible personal property are generally subject to sales tax But occasional, casual, and isolated exceptions in most states However, some states don t have such an exception (Colorado, New York, Oklahoma, and Wyoming) And some states require the sale of the entire business for the exception to apply
Disadvantages of Asset Sales Opportunity for counter-party to adjust a disadvantageous contract Some states (e.g., New York) impose sales taxes even in an M&A context Transfer of real estate could trigger tax
Disadvantages of Asset Sales Opportunity for counter-party to adjust a disadvantageous contract Some states (e.g., New York) impose sales taxes even in an M&A context Transfer of real estate could trigger tax Need to be concerned about successor liability issues
Disadvantages of Asset Sales Opportunity for counter-party to adjust a disadvantageous contract Some states (e.g., New York) impose sales taxes even in an M&A context Transfer of real estate could trigger tax Need to be concerned about successor liability issues Seller will likely be hit with double tax if it is a C corporation
Disadvantages of Asset Sales Board of directors and shareholders must approve the sale
Cash at closing o From the buyer s resources o From a bank loan/mezzanine financing
Cash at closing o From the buyer s resources o From a bank loan/mezzanine financing Seller financing
Cash at closing o From the buyer s resources o From a bank loan/mezzanine financing Seller financing Securities issued by the buyer
