TIP OF THE MONTH - February 2008

What If the Kids Don't Want the Business?

So much for succession planning! There are just some times when everyone benefits by ceasing family ownership. Business owners who decide to sell their business can structure the transaction to be an asset sale or a stock sale. In the former, the buyer purchases the business assets outright for cash (less liabilities assumed), debt, stock or a combination of these. In a stock sale, on the other hand, the buyer purchases a majority interest in the company's stock, simplifying the transaction because the legal entity remains unchanged. However, since cash is usually required to purchase the stock, outside financing is usually required. From a buyer's standpoint, there may be both advantages and disadvantages to each of these types of transactions. The following highlights some of the potential benefits and detriments.

Asset Sale Benefits

Basis of assets is revalued, leading to revised depreciation deductions that may lower taxes, and enhance cash flow
Acquisition can be structured for cash or debt.
Simplifies integration with acquiring entity since only specified assets and liabilities are transferred but the business is not acquired.
Avoids potential liability claims against the former business that are unknown at the closing.
Assets and debts the acquirer does not want can be eliminated from the deal.

Asset Sale Detriments

Greater complexity since each asset is transferred individually and must be given a new basis.
Greater professional costs since attorneys and accountants have to do more work.
Possibility of transfer taxes at the state and local levels.
Extra care may be required not to violate creditor rights and to avoid disrupting customer and vendor relations.

Stock Sale Benefits

Acquisition can be made at "market" price if stock is publicly traded.
Transaction ease since stock purchased for cash.
Minimal accounting and legal work and fees.
Entity remains unchanged legally.
No shareholder approvals required.

Stock Sale Detriments

All legal liabilities have to be assumed by the new owner(s).
Can't step up basis of acquired assets to obtain greater depreciation or amortization, deductions.
Greater cash requirements and financing needs.
May require regulatory approval from the SEC, FTC, or another agency.

These are just some of the things clients should consider when selling or acquiring a business. Each transaction must be evaluated on its own to determine the financial and tax consequences of different arrangements for the parties. All of us comprising the client's "team" of advisors can help analyze these factors to enable them to negotiate a deal that is most suitable in the particular circumstances.