Understand the Structural Formats for Business Sales
Before buying or selling a business, one needs to know how exactly that will be accomplished. Whether it be for tax purposes or legal purposes, both parties should be aware of the advantages and disadvantages of the different structural formats of the sale.
The three main structural formats of business sales are:
- Asset Purchases
- Stock Purchases
- Partnership Agreements
Asset Purchases are Most Common Method of Business Sales
An asset purchase means that the buyer forms their own corporate legal entity (either a corporation or a limited liability company) and purchases the assets of the seller’s corporate entity. This generally means that the buyer will not inherit any of the seller’s liability (such as lawsuit liability, debts, or tax liability) upon the sale of the business. The buyer will be doing business with their own corporate legal entity (not the seller’s) and is not purchasing the seller’s actual legal corporate entity (which includes the seller’s tax ID number or bank account).
Most Buyers Will Want Asset Purchase Sales
Most buyers will want to structure a business transaction in this manner because they will not want the seller’s liability. The seller may dissolve their corporate legal entity after the sale, and will simply all of the assets that their corporate entity owns at the time of the sale. Normally this will include all of the tangible and intangible assets of the seller’s corporate entity.
An Example of A Common Asset Purchase Sale Structured Agreement
- Let’s say Jill wants to buy Paul’s Ice Cream Shop.
- As the business broker will explain in the listing material, Paul’s Ice Cream Shop may legally be owned by XYZ, Inc (which is owned by the seller of Paul’s Ice Cream Shop).
- Jill does not wish to be the actual owner (or shareholder or officer) of XYZ, Inc. After all, who knows what unknown legal or tax liability of XYZ, Inc. may in fact exist.
- So Jill forms ABC, Inc. and purchases all of the tangible and intangible assets of XYZ Inc. (such as its leasehold rights, equipment, customer goodwill, company goodwill, and the right to do business as Paul’s Ice Cream Shop).
- This structural format is the most common form of business purchase.
Stock Purchase Sales in South Florida
A stock purchase deal simply means that the buyer will personally purchase the seller’s actual corporate legal entity. If the seller does business as a corporation then the buyer will purchase all of the shares of the corporation and thus becomes the corporation’s owner and sole shareholder. If the seller does business as a limited liability company (LLC) then the buyer will purchase all of the membership interests of the limited liability company and thus becomes the LLC’s sole managing member
Most Buyers Do Not Want A Stock Purchase Deal
With a stock purchase deal, a buyer will inherit all of the sold corporate entity’s tax or legal liability. For this reason, most buyers do not use stock purchase deals when structuring their purchase proposal. In some specific circumstances, however, a buyer will want to a stock purchase deal in order to take possession of the seller’s tax identification number.
An Example of A Stock Purchase Deal
- Let’s say Jim wants to buy a home healthcare company called Therapy To You. The true owner of Therapy to You is XYZ, LLC.
- As the prospective buyer, Jim is very concerned about losing the insurance contracts under which Therapy to You does business.
- This is because if Jim uses the regular asset purchase format, he will have to form his own corporate entity and will have a new tax identification number (and will have to re-apply with the insurance companies to get ‘under contract’ with the different providers).
- Thus Jim decides to take the risk and proposes a stock purchase deal.
- He will thus simply become the new managing member of XYZ, LLC by purchasing all of its membership interests.
- It is of paramount importance that the business broker involved in the deal proactively present both of these options along with the advantages and disadvantages to the buyer.
- The value of a business broker in holding a deal together is demonstrated when helping the buyer find this most favorable structural format.
Partnership Agreements Not Common and Require Extensive Legal Assistance
The final type of structural formal for business sales are partnership agreements. Partnership agreements may be structured in any number of different ways. Typical partnership agreements are true partnership agreements whereby buyer and seller will each have half ownership interests and partnership agreements which leave with the seller with a minority ownership stake.
Why Partnership Agreements Are Not Common for Business Sales in South Florida
Buyers and Sellers normally will not want each other as partners. If a buyer is buying a business, the buyer will normally want to retain sole authority over the operations of the business. Any sort of ‘power-sharing’ arrangement is very hard to implement in practice. Further, the high transaction costs of having lawyers draft partnership agreements often will dissuade either party from moving forward.
Give Martin at Five Star Business Brokers of Palm Beach County a call today with questions about how to best structure the sale of your business.