There are generally three ways to sell your business: 1) assets, 2) stock purchase, and 3) bootstrap. The decision to structure the sale of your business involves consideration of a variety of factors. First, let’s break down the differences of each. Asset Sale. An asset sale is essentially a collection of separate transactions involving the property owned by the business. This property is transferred in accordance with the particular laws applicable to each separate category of property. These include goods, real estate, trademarks, or other intellectual property. Stock Sale. A stock purchase comes in the form of a corporate merger, reorganization, or other acquisition of an ownership interest in an existing business entity such as a corporation or LLC. In this type of transaction there is no transfer of ownership in the assets of the seller. Bootstrap Sale. A bootstrap and other more complex forms of sale exist to fit limited circumstances where the buyer may need assistance in financing the purchase of the outstanding stock and the acquired corporation’s cash and other liquid assets exceed its business needs. The transaction itself consists of a substantial part of the stock owned by the shareholders of the acquired corporation being redeemed and the remainder of the stock acquired through purchase by the buyer from the selling shareholders.
The Analysis
Asset purchases are more common in liquidation sales where a Seller has a weaker bargaining position. Buyers generally prefer to purchase assets because it is possible to select only the desired property of the business that they desire and only liability liabilities that are specifically assumed, subject to bulk asset sales and other possible exceptions. There some interesting tax advantages to buyers too in that inventory can be include a stepped-up basis for tax purposes–especially where the assets’ fair market value exceeds the book value. Sellers should generally resist an asset purchase because there may be some left over assets or liabilities of the business that are not able to be liquidated. For the same reason there may be a tax advantage to the buyer will be a disadvantage to the seller in a asset sale. Where the seller has a better position or where the parties would prefer a simpler transaction, a stock acquisition may be appropriate. Sellers of business usually prefer a stock sale because it allows a complete release of corporate liability and rids the seller of the entire business in one simple transaction. Most significant is the favorable capital gains treatment that this kind of sale endures. A buyer’s major concern in a stock purchase is the assumption of liabilities of the purchased entity. This includes all liabilities that may even be hidden or unknown. Though, this concern can be minimized through property disclosures, indemnity clauses and insurance. In some cases, like in franchise or multi-level marketing businesses, transfers or assets sales may be contractually prohibited and a stock purchase may be the only option. Additionally, an entity’s credit history, insurance rates, tax losses, or other entity-tied benefits may also make a stock purchase more favorable. Though the stock purchase transaction is simple, buyers and sellers not represented often miss issues surrounding personal guanties, minority shareholders, and the effect on some contractual agreements that may restrict the means of transferring majority ownership of an entity.
