Mergers & Acquisitions...
Merfeld & Schine, Inc.

Selling a Business:
Transaction Structures


Selling a business is not as simple as agreeing to a price, and collecting the amount agreed upon. Is the stock of the corporation being purchased or is it an asset sale, meaning all the assets of the company are being purchased though technically not the corporation itself? Does the price include the accounts receivable? If so, what if some of those receivables are not paid? Does it include other assets? Does it include the liabilities? Suppose the balance sheet net worth is different on closing day from what it was when the initial deal was agreed to (as it almost certainly will be)? All these issues must be addressed in the transaction.

Asset vs. Stock Sale

The most likely scenario for most smaller, privately held companies is an asset sale. Attorneys generally prefer an asset purchase for small closely held corporations because it protects the buyer from contingent liability of the corporation that may surface after the closing. For example, if you sell your company by selling all its stock and that company is later audited by the IRS and found to owe back taxes, the IRS will hold the new owner responsible. Under an asset sale, the buyer will not be held responsible if this unpleasant possibility comes to pass.

This is a bit of an oversimplification. Many small companies are sold on a stock sale basis for any number of good reasons. Though it is an important issue, seldom do deals fall apart because one side wants an asset sale and the other insists on a stock sale. In either case, there are a number of ways we can suggest to minimize the perceived disadvantages of either method.

Tax implications, Stock Vs. AssetSale

In most instances, there is a tax advantage to the business seller if the company is sold on a stock sale basis. In essence, any capital gain is taxed at the capital gains rate. In an asset sale, some of the funds received will likely be taxed as ordinary income.

Allocation of Business Sale

In an asset sale, buyer’s and seller’s accountant will typically meet and allocate the sale. That is, a certain amount will be allocated to tangible assets, an amount to a non-compete agreement, an amount to goodwill, etc. The allocation has tax implications for both buyer and seller. To a degree in fact, what is good tax wise for the seller is bad for the buyer and vice-versa. Again, even though buyer and seller are at cross-purposes, deals seldom collapse over allocation disagreements, although sometimes compromises and accommodations need to be made.

Proposed Balance Sheet at Closing

A balance sheet is often described as a snapshot of a company's financial position at the moment in time that it is compiled. As such, balance sheets change from day-to-day and will most certainly change from the point when an agreement is reached to the point when a deal is closed.

If the balance sheet net worth is for example, $20,000 lower at the closing than it was when the offer was accepted, that business should be worth $20,000 less than it was at that time. Conversely, if the balance sheet is $20,000 higher at closing than it was when the offer was accepted, that business should be worth $20,000 more than it was when the offer was accepted.

To mitigate the arbitrariness, in selling a business, we use a Proposed Balance Sheet at Closing. That is, we prepare a balance sheet that approximates what we believe the balance sheet will be at closing. The offer is accepted assuming the proposed balance sheet will be the same as the actual balance sheet at closing.

If the net worth of the actual balance sheet is lower than the proposed balance sheet, the price is correspondingly reduced (assuming the offer was accepted based upon the proposed balance sheet and the parties agreed to using this procedure). If the net worth of the actual balance sheet is higher than the proposed balance sheet, the price is correspondingly increased (again, assuming the offer was accepted based upon the proposed balance sheet and the parties agreed to using this procedure).

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We focus on (but do not entirely limit to) companies with sales in the $1MM to $20MM range located in the New England States: MA, CT, NH, RI, VT, ME.

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Providence, RI 02906
Phone ~ 401-751-3320
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