If you operate your business as a corporation when the time comes to sell it you’ll be faced with a decision: Do I sell the stock or the assets? There are a number of factors that will weigh in on your decision.
Tax Issues: There are a number of tax issues that will affect your decision. Unfortunately, the tax consequences for you as the seller are often in direct conflict with those of the buyer. If you sell the stock of your company you pay a favorable capital gains rate, by and large at 15% on your government return. However, this may cause the buyer to miss out on some significant tax breaks.
Several examples of this are:
1) If your business has a fair amount of equipment in it, and you have been aggressive in depreciating it, your basis will be much lower than the market value for that equipment. The buyer expects to receive the equipment at fair market value so that he may depreciate that value. In an asset sale, the equipment is usually sold at market value. In a stock sale, the seller would receive the seller’s low depreciated basis with little left to depreciate.
2) If the business has intangible assets such as patents, trademarks, or just a lot of goodwill, the buyer will again miss out on a step up in basis that they are paying you for if the sale is a stock sale.
If your business is taxed as an “S” Corporation, you can still achieve the favorable capital gains rate on most items. Except for depreciation recapture, the buyer will be able to perform a new step up in basis. The “S” Corporation passes all the gains on to the shareholders, so there is only one level of tax. The problem comes when you have been operating as a “C” Corporation. If you sell the assets of a “C” Corporation, they pay a tax on the sale, without the benefit of the lower capital gains rate. When you pass the remaining money from the sale on to the shareholders they pay a second tax on that distribution. This is why “C” Corporation owners want to sell stock rather than assets, but as explained earlier, the buyer would rather not buy the stock.
There are several major non-tax issues that impact an asset sale vs. stock sale decision.
1) If the buyer buys your stock, he will inherit your liabilities – both known and unknown. Usually, it’s the fear of the unknown liabilities that scares a buyer. In an asset sale, the buyer typically avoids inheriting your liability problems.
2) Sometimes a buyer must buy the stock of the company even though he doesn’t receive the favorable tax treatment. If the corporation has valuable contracts or other assets that can only be utilized by the corporation and can’t be transferred, then the buyer must purchase the stock in order to continue utilizing those assets.
If you’re considering selling your corporation in the near future, you should meet with your advisors as soon as possible to discuss any of the above issues that might hinder you getting the most benefit for your business.
Wayne A. Simpson CPA, CBI is a Managing Partner at Utah Business Consultants and a Certified Business Intermediary with the International Business Brokers Association. Utah Business Consultants is a full-service Business Brokerage and Valuation firm.