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Overview of deal structures when selling a business

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For business owners, the sale of their business will likely be one of the largest events they encounter during their life. Accordingly, the business owner should take the time to understand the …

For business owners, the sale of their business will likely be one of the largest events they encounter during their life. Accordingly, the business owner should take the time to understand the process with the guidance of an expert who has experience with business sales to reduce the risk and maximize profit.

Published in: Business, Technology

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  • 1. OVERVIEW OF DEAL STRUCTURES WHEN SELLING A BUSINESS – PART 1 (TAX CONSEQUENCES) By TREVOR CROW www.biztaxbuzz.com
  • 2. Introduction  For business owners, the sale of their business will likely be one of the largest events they encounter during their life.  Accordingly, the business owner should take the time to understand the process with the guidance of an expert who has experience with business sales to reduce the risk and maximize profit.  In this two-part series of posts, I examine the most common types of deal structures that business owners use when selling their businesses. Throughout this series of posts I refer to stock generically as the representation of ownership interests in the business, but the same concepts apply if you’re dealing with membership interests in a LLC.
  • 3. Introduction  While there are many variations of deal structures available, the vast majority of deals fall under one of two broad categories that are addressed below: (1) asset sales; and (2) stock sales.  One of the main factors to consider when deciding between an asset sale and a stock sale is the tax consequences.
  • 4. Asset Sales  An asset sale results in the best tax benefit for the buyer. In an asset sale, a buyer purchases only the assets of the selling business that it agrees to purchase and the price paid is allocated among each of the purchased assets.  Buyer’s tax basis in all the purchased assets will be equal to the total purchase price. And the Buyer’s basis for each asset will be the amount that the parties agree to allocate to each of the assets purchased (provided the allocation is reasonable).
  • 5. Asset Sales  In general, the Buyer will want to allocate the most money to assets that depreciate on the shortest depreciation schedule.  An asset sale will benefit the buyer when taking depreciation and will also benefit the buyer when there is a subsequent sale of the assets purchased.
  • 6. Asset Sales  On the other hand, the tax consequences to the seller in an asset sale are not as favorable.  If the seller is a C corporation for example, then the gain from the asset sale will be taxed at the corporate level for federal income tax purposes, and then the remaining cash left in the company will be taxed to shareholders of the company when the proceeds of the sale are distributed as dividends.
  • 7. Asset Sales  If the entity is an S corporation or an LLC, there will usually be only one level of tax in an asset sale because these entities are considered pass-through entities for tax purposes.  However, as explained below the tax treatment to the seller in a stock sale is usually more beneficial to the seller regardless of seller’s form of entity.
  • 8. Stock Sales  A stock sale is typically beneficial to the seller. In a stock sale, the buyer will get a basis in the stock, which can’t be amortized, but typically does not get an increased basis in the purchased assets (unless the buyer makes a Section 338(h)(10) election, which is outside the intended scope of this post).
  • 9. Stock Sales  With a stock sale, the seller’s entity type doesn’t matter because the shareholders will only be subject to one level of taxation and typically at lower capital gains rates.  While the lower capital gains rates make a stock sale beneficial to all forms of seller entities, often a stock sale is not seriously considered as an option unless the seller is a C corporation and subject to the double taxation that occurs if the sale is structured as an asset sale.