Structure of the Transaction: Selling Your Business

David Young is a Partner at DLA Piper (http://www.dlapiper.com/). In this video he discusses the structure of selling your business.

  1. Main concerns: 1. Tax 2. Limitation of liability
  2. An asset sale provides distinct advantages for a buyer
  3. A stock sale benefits the seller because buyer assumes all liability

When you look to sell your business, the structure of the deal is really important, and it’s something that makes a huge difference from an economic perspective. And so usually, it should be addressed very early in negotiations or at least in thinking about how you want to go about looking in a deal, structuring a deal, talking to buyers.

Really, the main drivers are tax and also just limitations of the substantial liabilities from the buyer’s perspective. There are really two main structures. One, would be an asset sale.

Generally, the buyer, always prefer a structure deal as an asset sale. There’s tax advantages to the buyer where they can depreciate the purchase price over a period of years or release part of it. And then most importantly for the buyer, they are able to only assume very specific liabilities if any liabilities.

Whereas in a stock deal is generally what the seller prefers. With an asset sale to the seller, there are two levels of tax. You sell – the purchase price is taxed at the corporate level and then again, when you give it ended out of your company to the stock holders whereas in a merger there’s one level of tax generally capital gains at lower rate.

And also very key to the buyer – to the seller, the buyer is forced to basically assume all liabilities of the company. They are actually buying the company itself. So if there’s any unknown liabilities or anything that comes up later other than something contractually agreed identification it basically becomes the buyer’s problem where for the seller with an asset deal, you are forced to – you sell your assets and then you actually have to deal with winding down the existing entity and paying off its liabilities and sort of doing into solution under a corporate lock.

So basically, in looking at selling the company it is really important to address it early on the structure. And it’s important to work with your tax advisers. Your legal advisers can help you navigate what to do, but it is going to make a big difference in both from the liability and economic standpoint and just have the purchase prices tax and allocated. It’s something you do you want to address early on.