Stock Sale vs Asset Sale
Most small business sales are asset sales, meaning you are buying all the assets of the business, but not the entity itself. The assets probably include the name, the phone number, the client list, the website, any company vehicles, the computers, and the equipment. They are not buying your LLC or S Corp unless it’s a stock sale.
In a stock sale, the buyer takes over your entity by purchasing the shares of your business, similar to buying shares in AT&T or McDonald's. In a stock sale, the buyer takes over your bank account, your payroll accounts, all your liabilities, your accounts receivable and everything else you can think of.
The rule of thumb is, ”what’s good for the seller is bad for the buyer, and vice versa”. As a seller, you would prefer to sell your stock, because then your entire sale would be considered capital gains. Capital gain is the best type of income to have. It has the lowest tax rate and sometimes that rate is even zero. But, this will put the buyer at a disadvantage for tax purposes.
Depreciation is a group of random rules made up by the government telling you how you are allowed to write off business assets. You can’t write off or depreciate stock. If your buyer acquires your company in a stock sale, there will be nothing for them to depreciate. Whereas, if they buy your assets, your equipment, they can take full depreciation of those assets even if you had already depreciated them. That will go a long way to easing the buyer's tax burden.
The rule "what's good for the seller is bad for the buyer" is true within an asset sale as well. If you go the route of an asset sale, you and your buyer will need to allocate the total purchase price amongst all the assets involved in the sale. If you sell your business for $900K, you will need to negotiate how much of that $900K will be allocated to the equipment, how much will be allocated to the client list, how much will be allocated to the non-compete agreement, and how much will be allocated to goodwill. And yes, what’s good for the seller here, is bad for the buyer. That’s why it needs to be part of the negotiation. This allocation will determine how much you pay in taxes and how much and how fast your buyer can write off the purchase. The allocation also needs to be reported on the tax returns of both the buyer and the seller, so hopefully they match.
Without good tax planning, for example, that $900K business sale could result in $600K or less going into your pocket. Don’t finalize any deal terms until you’ve analyzed it through the tax lens.
Taxes must be considered UPFRONT, not as a deal afterthought.
