Allocations in Structuring a Sale
Uncle Sam is going to feel the need to get his.
How do the value of the assets of your business affect your total bottom line when the business is sold? The answer lies in the after-tax consequences of your transaction. For the seller, transition tax planning prior to a sale, in concert with your accountant, attorney, financial advisor and M&A professional, will enable you to realize the optimal after-tax value for the sale of your business.
There are numerous ways to structure a business sale transaction. The two most commonly used of those being the Asset Sale and the Stock Sale.
For the small to middle sized markets the most frequently occurring of these is the Asset Sale, in which named assets of the business are sold to the acquiring party and the seller retains their ownership structure (Corporation, LLC etc.) as a separate entity.
In the event of a Stock Sale, which is often less attractive to an acquiring party for a variety of reasons, the entire selling entity (Corporation) is conveyed to the buyer, typically as it appears on the most current balance sheet.
An integral part of every business sale/acquisition is the Allocation of Values. The buyer and seller must name the assets being sold and agree on the value of each and then report the agreed upon allocations to the IRS. This will determine the tax ramifications of the transaction.
Typical asset categories are:
Tangible Assets – Fixtures; equipment; inventory; real estate; accounts payable/receivable.
Intangible Assets – Goodwill; Covenant of Non-competition; Name(s); Domain name(s); URL; phone numbers; leasehold right; Seller transition/training/consulting; customer lists and many more.
In the case of a Stock Sale the allocations will reflect the existing balance sheet while in the case of an Asset Sale the parties generally have more flexibility in structuring the allocations to obtain more preferable tax ramifications.
An important point to remember is that a business sale is market driven. Both parties must agree on the total value, sale structure and asset allocation. The final outcome of a transaction will reflect the market forces at hand.