We’ve all heard the catch phrase, "you get what you negotiate." As it relates to buying a business, the same philosophy holds true. Perhaps "you get what you want to negotiate" is closer to reality. I’ll explain. The first issue to address is what form of an offer to make, stock purchase or an asset purchase. A stock purchase is an acquisition of the corporate stock from a corporation. An asset purchase is an acquisition of assets and other portions of a company’s balance sheet.
In the larger public markets, stock purchase transactions are the norm. However, in smaller mid-market deals under $10,000,000 in value, stock buy-outs are rare. Why? Although virtually every seller is willing and wanting to sell their "stock" instead of their "assets," most buyers aren’t as willing. The downside for the buyer on a stock transition is mainly contingent liabilities and taxation. When a corporation’s stock is acquired, the buyer is acquiring the corporate entity, and all the good and bad that is attached. Conceivably, the buyer could be held liable for something that happened before the purchase but unknown at the time of settlement.
Another tangible downside is that most companies will take advantage of every opportunity to accelerate depreciation. The buyer of stock inherits assets that are either fully depreciated or that have been mostly depreciated, limiting the buyer to whatever depreciation is left.
The vast majority of small to lower mid-market companies are asset purchases. Much activity and selectivity are done in the execution of an asset purchase. In a nutshell, the buyer is virtually always acquiring at least three things: fixed assets (like equipment, vehicles and office systems), inventory (especially in manufacturing and distribution companies), and goodwill (both tangible and intangible). In this scenario, the seller would retain cash accounts (cash, savings accounts and receivables), and would pay off all liabilities (both short and long-term including lines of credit). Regardless of what is acquired, the asset purchase is the best example of where you can "get what you want to negotiate."
Unlike a stock purchase, an asset purchase is selective of certain portions of the balance sheet. For example, some buyers may want to negotiate acquiring the receivables and payables, and an amount of working capital (a portion of the cash accounts). The seller will likely look at the overall price and structure (payment terms) of the deal when selective pieces of the balance sheet are being negotiated. Sellers typically want to keep a few assets that the company has acquired over time such as a vehicle, some artwork, or a country club membership. But everything is up for grabs, and a clear delineation of where assets and liabilities are going is necessary.
In the long run, either form of purchase, whether stock or asset will work. The critical issues are price, structure, and taxation. Once you’ve made up your mind as to the form of purchase (stock vs. asset), then it’s a matter of negotiating with the buyer to purchase the assets on the balance sheet you want to acquire.
Bradley G. Marlor MBA, 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. He can be reached at [email protected].