The sale of your business is about more than price. Structure and terms also matter. In this post, we answer the question about the structure by which you will sell your company. In most cases, the optimal outcome for a seller is to sell the entity. At the same time, a buyer may think that acquiring only a limited number of assets while leaving behind liabilities is the optimal outcome. In this chart, we compare the key attributes, advantages, and disadvantages of mergers, stock sales, asset deals, and licensing deals.
| Type of sale | Key attributes | Advantages | Disadvantages |
| Merger. | This is the easiest way to sell the entity. A merger is a statutory concept that allows some number of stockholders, plus some number of members of the board of directors, to adopt the fusion of the company into another company without unanimous approval, leaving only one company outstanding in the end.
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· The seller disposes of the entire entity, including all liabilities.
· Only the requisite number of holders need approval. · Consideration can be paid directly to the selling stockholders. · If selling stockholders have held the asset for long enough, capital gains tax treatment can be available. · When certain additional criteria are met, “qualified small business stock” treatment is available. |
· Unless the seller carves out assets it wishes to keep in advance, the seller will dispose of all assets.
· Sometimes, a merger will trigger the termination of a contract with a customer, supplier, vendor, lessor, lessee, or other contractual counterparty. · Government approvals can be required, and filings are certainly required. · Antitrust filings may be required, and statutory waiting periods must expire before closing if the deal or the parties exceed certain size thresholds. · Stockholder and board approval are required. |
| Stock sale. | In this type of transaction, control is acquired through the purchase and sale of the selling entity’s equity securities.
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· Because ownership of the entity is transferred in its totality, sellers don’t have any mess to clean up afterward, much like a merger.
· As the legal entity has not been changed or disrupted, the sanctity of its contractual rights usually remains more intact than in a merger. · Favorable tax treatment is available, much like a merger. |
Each selling stockholder has to sign up for the sale, making it cumbersome. Otherwise, it is just like a merger. |
| Asset sale | In this type of sale, a seller can sell only those assets that it desires to dispose of and retain others. Similarly, buyers can pick and choose assets and leave others behind. Unfortunately for sellers, the same can be said for dreaded liabilities. Your company continues to exist and may need to be liquidated, which can be a hassle. | · In an asset deal, buyers and sellers have the flexibility to handpick the package of assets and liabilities that they want to transact upon.
· On the plus side for sellers, this allows sellers to continue monetizing a business that they think has more value while disposing of what is no longer core. · Sometimes, stockholder approval is not required. · Significant tax benefits can make the deal richer, as the buyer will, in many cases, be able to obtain a “step up in basis” with respect to the assets it purchases. |
· If the business being sold is profitable, the tax consequences to the selling stockholders are sometimes punitive. This is because the selling corporation will have to pay tax on the excess in proceeds over its carrying basis for the assets being sold. Then, each stockholder will have to pay tax on the distribution of proceeds to the extent of excess over its basis. This is called double taxation.
· Moreover, it’s a hassle for the selling corporation to deal with the mess of making distributions to its stockholders. · Usually, board and stockholder approval is required. · If most assets were sold and there is no intention to carry on, the seller is left with the burden of liquidating the entity and making all of the tax and corporate filings. · If the amount of consideration or size of entities exceeds minimum thresholds, antitrust filings may still be required, as well as the expiration of statutory waiting periods or unless approvals are granted. |
| License | Rather than “sell” an entity or an asset, a seller can transact by making a license, which would usually be exclusive, to operate its technology for the life of the protection that it has on its intellectual property. | · Board and stockholder approvals may not be required unless stipulated in the charter.
· Antitrust filings usually do not apply to licenses of intellectual property unless they are tantamount to the sale of the business. · These deals can go faster. |
· Much like an asset deal, the licensor will have all of the burdens of distributing proceeds to the stockholders and continuing to maintain and operate the licensing entity, and its intellectual property protections (e.g., maintain its patent, trademark, copyright or other filings, or maintain trade secrets). |
| Recruitment | In this kind of transaction, a buyer refuses to buy the selling entity or any of its assets and simply wants to recruit the team.
Sometimes, a recruitment happens concurrently with a licensing deal.
Often, the preferred path for buyer.
Option often overlooked by sellers. |
· Speed and flexibility.
· Pick and choose the team you want; leave behind the members of the team you don’t want. · No approvals are required. |
· Because no assets are transacted or licensed, little to no asset value is realized for the sellers, except for a small signing bonus, if available.
· There remains the business of the selling entity and perhaps no one to operate it, so you have the hassle and expense of liquidating. |
How do you know what deal is right for you? It depends…and price, terms, and taxes will each play a role.
Entrepreneurs often are so focused on the business that they neglect to plan for their own personal estate and taxes. Get a wealth advisor, set up an estate plan, optimize for yourself, and set aside money to pay taxes you will owe.
Your A-team of advisors can help guide you.