Most sellers know that preparing for a sale requires certain homework, such as cleaning up business and corporate records, and considering key employee retention arrangements. Another important way to prepare for a sale is to be ready to negotiate deal structure.
Essentially, a sale of a business can be structured as a stock transfer (whether as a stock sale or a merger) or an asset sale. They each have their own pros and cons.
Normally, a seller will prefer a stock transfer. In a stock transfer, (1) all liabilities are transferred to the buyer, (2) there can be less need to obtain third party consents to transfer important contracts, and (3) there is only one level of tax for the seller. The seller is taxed at the shareholder level.
On the other hand, a buyer will often prefer an asset purchase. In an asset sale, (1) assets can be “cherry picked,” (2) liabilities are retained by the seller unless they are assumed, and (3) the buyer can obtain a “stepped up” tax basis in the acquired assets. In an asset deal, a corporate seller is taxed at both the corporate level and the shareholder level (unless the corporate seller is an S corporation).
However, it would be an oversimplification to say that all sellers should insist on stock deals. Here is an example.
Assume that a buyer would be prepared to pay $100M in a stock deal.
Determining the ideal structure for a deal requires a careful analysis of applicable facts. There is no one-size-fits-all formula. (In fact, there is a hybrid alternative where an acquisition of the stock of an S corporation or of the subsidiary of a consolidated group can be treated as an asset deal for tax purposes.) But one thing is certain. Carefully considering and preparing for negotiation of deal structure can be a key to unlocking significant additional value.