Agreeing to a sales price is hardly the final step in the negotiation process in the sale of a business. Even once the discussions have led a preliminary agreement to transfer ownership of a business at a particular price, the parties to the transaction still might not be on the same page as to what exactly entails “the business” that is being transferred. The buyer’s understanding of “the business” might be limited to the “purchase” of staff, assets and the client list, while the seller might think the transaction simply means the business will stay the same with the new owner simply taking over his spot in “the boss’s chair.” Each side’s understanding can be shaped by any number of factors, from maximizing tax savings to minimizing liability in the future.
Ultimately, many of the buyer’s goals may directly conflict with the seller’s. For example, a seller can’t absolve itself of future liability without passing that future liability to the buyer. However, that conflict does not mean that negotiations and the final terms of the deal have to be adversarial, as open communications between both parties can often facilitate both parties reaching a mutually satisfactory compromise.
Regardless of the reasons for selling the business, almost all sellers have the same ultimate goal in the transaction – maximizing financial gain (or the sale is to cut losses, at least trying to minimalize financial loss) while removing future liability. To reach that end, majority owners and sole owners of company stock would be much more interested to have the sale involve the transfer of stock ownership rather than focusing on the company’s assets.
Wanting the sale of the company to take place in the form of stock transfer makes sense on several fronts for the outgoing owner. Assuming a successful run as owner, the company’s historical success could translate to an increased value of the company’s stock. Depending on the differences in the capital gains tax and the income tax at the time of the sale, the net value of the transaction for the seller could be substantially higher by executing the sale as a stock transfer rather than a cash sale.
Another positive for a seller in a stock transfer is that any future liability in the company transfers to the owner of the stock. By passing that liability through the sale, the seller may be able to avoid any unexpected financial responsibilities for actions brought against the company in the future.
Buyers are also interested in maximizing the value of their purchase. One of the main tools available to a buyer is to purchase the company as a group of assets. By taking on the assets of the other company, the value of the company is extended through yearly depreciation and amortization of those assets, which allows for long-term value protection.
Another major benefit of purchasing a company as assets rather than as stock is the ability to eliminate potential liabilities in the future for the company’s past actions. Taking on only the company’s assets prevents any future surprises for the buyer.
Issues for Both Sides to Consider
Other important portions of the transaction can be easy to overlook without careful consideration of the full implications of the deal. If the business will continue to operate under the same trade name after the sale, the company trademark or any copyrights must be written to be a valid transfer of ownership. If the support staff or other employees will not follow the new ownership, should the new owner have them sign a non-competition agreement? Regardless of the nature of the transition, will there be an overlap where the outgoing owner shares the intangibles such as client introductions, or will it be a clean break with no expectation of knowledge transfer?
Even with often-conflicting interests, open communication and realistic expectations by both parties can make the entire transfer process one that leaves both parties feeling their best interests were achieved.
If you have questions regarding the legal issues surrounding the sale or purchase of a business, please feel free to contact us.