A business can be sold in two ways. The choice changes who carries the liabilities, how the sale is taxed and how much paperwork the closing takes.
Asset sale
The buyer purchases chosen assets, such as equipment, inventory, the business name, customer lists and goodwill, and agrees to take on only the liabilities listed in the contract. The seller's company keeps everything else. Buyers generally prefer an asset sale because it limits their exposure to debts and claims they do not know about. The drawback is that contracts, leases and licenses have to be transferred one at a time, and some need another party's consent.
Stock sale
The buyer purchases the company itself, by buying its stock or its membership interests. Everything comes with it: contracts, history and liabilities, known and unknown. Sellers often prefer a stock sale because it is a cleaner exit. Contracts usually stay in place, though some have clauses triggered by a change of ownership.
Decide at the letter of intent
Price means little until the structure is settled, because the same price produces different results for each side under each structure. The letter of intent is the time to decide it, not the week before closing.
Other terms that matter
- How the purchase price is allocated among the assets
- Seller financing, and what secures it if the buyer stops paying
- The seller's agreement not to compete
- What the seller promises about the business, and what happens if a promise proves untrue
- The lease or the real estate
- What happens to the employees
Tax consequences often drive the decision, so we work alongside your accountant. Call us before you sign a letter of intent.