Structuring a Business Transaction
The sale of your business is an exciting time! However, it can also be a stressful time. If you aren’t familiar with how to structure a business transaction, this article should help. Always remember to consult with a valuation expert like Peak Business Valuation, business appraiser Texas. They can help you walk through all the steps of structuring a business transaction.
What types of Business Transactions are there?
For most companies, there are two ways to structure a business transaction. There are asset structured transactions, and stock structured transactions.
Asset Structured Transaction
An asset structured transaction is a transaction that involves the purchase and sale of specific assets of a business.
In an asset sale, the buyer purchases the individual assets of the company. The buyer can, if they choose, assume some of the liabilities as well. Then, the buyer then puts the assets and liabilities into an entity of their choice.
The seller of the business remains the legal owner of the selling entity. As such, they also remain responsible for any legal action taken against the business post-acquisition.
Common Assets to Include in an Asset Sale
The most common assets included in asset sales are:
- FF&E – furniture, fixtures, and equipment
- Licenses necessary to the operation of the business
- Customer lists
- Any other fixed and intangible assets
It is important to note that sometimes, the sale of the business does not include inventory. Occasionally, the buyer purchases the inventory in a separate transaction.
Or, sometimes the value of inventory is added to the total sale price of the business. The price for inventory is generally at “sellers’ cost.” This term refers to the price that the seller purchased the inventory for.
Asset purchases usually generally do not include any liabilities or debt. Additionally, asset purchases generally don’t include:
- Accounts Receivable
It is common for the seller to keep the cash of the business. The seller retains any and all liabilities, as well as long term debt. The seller is also responsible for collecting A/R. This mitigates the risk of the buyer assuming long, outstanding A/R.
Advantages of An Asset Purchase
The buyer dictates which assets, and which liabilities, if any, they are going to assume in the transaction. This limits the buyer’s exposure to liabilities that are large, unknown, or not stated by the seller. The buyer can also choose to avoid some added risk that occurs when A/R accounts become uncollectible.
- The buyer gets to choose which employees they want to keep on, and which they do not
- Any goodwill in excess of the value of the company’s tangible assets can be amortized for tax purposes. Contrast this with a stock purchase, and goodwill cannot be deducted until it is later sold down the road
Disadvantages of an Asset Purchase
- Contracts with customers and suppliers may need to be renegotiated and/or renewed by the buyer
- The tax cost to the seller is typically higher, which may result in them insisting on a higher purchase price
- Assets may need to be retitled in the new entity
- Employment agreements with key employees may need to be renegotiated
- The seller still has to pay any and all liabilities that have not been assumed by the buyer
Stock Structured Transaction
A stock purchase is a little bit simpler in theory than an asset purchase. A stock purchase is founded on the fundamental accounting equation.
Assets = Liabilities + Owners Equity (stock of the business)
When you purchase a business via a stock transaction, you are purchasing all assets and all liabilities of the business. By doing so, the accounting equation remains in equilibrium, as it always must. In a stock purchase, most of the contracts, such as leases and permits, transfer automatically to the new owner. Additionally, the assets and liabilities of the company also transfer over. The buyer then becomes the legal owner and responsible party of the entity.
Advantages of a Stock Purchase
- The buyer doesn’t have to worry about revaluation and retitles of individual assets
- Buyers can assume non-assignable licenses and permits
- Buyers may also be able to avoid paying transfer fees
Disadvantages of a Stock Purchase
- The buyer does not have the advantage of selecting which assets and liabilities they will assume
- Goodwill is not tax-deductible when it exists in the form of a share price premium
- Laws regarding multiple shareholders can complicate and drag out the process and cost of acquisition
- The entity acquired may still be subject to pre-sale liabilities, which adds risk for the buyer
These are the standard structures for business transactions. Peak Business Valuation, business appraiser Texas, sees these types of transactions every single day! However, as with most things in business, “Everything can be negotiated!”
Although most deals will follow the basic lines of either a stock or asset purchase, some deals may not. For that reason, structuring a business transaction can get complicated. Give Peak Business Valuation, business appraiser Texas, a call to talk with a professional regarding your business transaction!
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