RESOURCES

Structuring the Transaction

Once a serious and qualified buyer has been found, your negotiations begin. You will want to know what the buyer can and will do for your business, your managers and employees, your customers, and most importantly your long-term plans.

Asset Versus Stock Transactions

The purchase and sale of a company can be structured in one of two basic formats: (1) purchase of the assets of the selling corporation or (2) purchase of the stock of the selling corporation.

Asset Transactions

In an asset transaction, the assets to be acquired are specified in the contract. Practices vary from industry to industry but, in general, all assets of the company except cash convey to the buyer. None of the liabilities, except perhaps accounts payable, convey.

The selling corporation uses the proceeds from the sale to liquidate short-term and long-term liabilities. This means that the buyer purchases all of the company's equipment, furniture, fixtures, inventory, trademarks, trade names, goodwill and other intangible assets.

An asset transaction is generally advantageous to the buyer. The buyer may acquire a new cost basis in the assets which allows a larger depreciation deduction. The seller must pay taxes on the difference between the basis in the assets and the price paid for the company.

The buyer may prefer an asset transaction for liability reasons. By purchasing assets, the buyer may avoid the possibility of becoming liable for any of the selling corporation's undisclosed or unknown liabilities. The most common liabilities of this type are federal and state income taxes, payroll withholding taxes and legal actions against the company that are contemplated but as yet uninitiated.

Stock Transactions

In a stock transaction, all of the shares of stock of the selling corporation transfer to the buyer. Therefore, all of the assets and liabilities also convey. In some cases, the buyer and seller may choose to exclude certain assets or liabilities from being conveyed. The seller must pay taxes on the difference between the seller's basis in the stock and the price paid by the buyer.

Sometimes stock deals are more expedient for both parties. Stock transactions provide for continuity in relationships with suppliers. They may also preclude the necessity of obtaining a lease assignment when there is no such provision in the lease in the event of a change in the controlling interest of the corporation. The risk of inheriting undisclosed debts of the seller in a stock transaction can be minimized by providing for the buyer's indemnification and the right of offset to future payments due the seller.

In choosing to structure a deal as a stock transaction, the seller should be aware that the sale of stock in a closely held corporation falls under the umbrella of federal securities laws. This places a greater burden on the seller in a stock transaction to fully disclose all material information about the company. Failure to do so exposes the seller to the risk of securities fraud litigation.