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June 2014 Tip of the Month

What if the Kids Don't Want the Business?

So much for succession planning! There are just some times when everyone will benefit 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 we at Abo and Company often come across.

  

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.

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. 

As we mentioned in a previous email alert from Abo and Company, Marty Abo, was asked to "step up to the plate" as a director for The Exit Planning Exchange of Philadelphia (XPX).  XPX is dedicated to helping entrepreneurs prepare for an informed, organized and financially rewarding exit from their company. XPX's members are seasoned advisors who understand the value to an owner of having a team of advisors to support the exit process. Member specialties include law, banking, accounting, wealth management, investment bankers and business brokers, merger and acquisition professionals, insurance, business valuation, and business consultation. XPX's purpose is to help advisors gain thought leader training about the exit process, learn about the role of other disciplines and come together to form exit teams to better support their owner clients to achieve a successful exit from their businesses. Anyone interested in the organization should feel free to reach out to Marty.