Thinking about selling your company, great!
We can help you understand the legal and tax issues and address the complexity contained in the transaction documents. Let’s review a few terms that may arise in either your discussions, or in the review and signing of the letter of intent (“LOI”), and most assuredly will be contained in the definitive agreements. We cannot cover every item in a short blog but here’s a few you should absolutely be aware of:
Subordination
The buyer often borrows money from a bank or asset-based lender to acquire your company. If the buyer pays a portion of the purchase price by giving you a promissory note, it is most likely going to be subject to subordination conditions from their lender. That means you cannot be paid on the note unless the lender consents. If the buyer defaults to the lender you cannot be paid unless the lender is paid in full.
Deal Structure
Stock deal or asset deal. The “true stock/equity deal means the buyer is buying your ownership and you receive capital gains treatment on most of the purchase price you receive. The asset deal means you are selling your assets which will cause the proceeds you receive to be taxed as ordinary income and capital gain depending on how the purchase price is allocated among the assets you are selling.
Asset Sales Disguised as Equity/Stock Deals
We have done two transactions recently in which the seller thought they were getting stock/equity treatment for tax purposes, but the structure for tax purposes was actually an asset deal for the benefit of the buyer to the tax detriment of the seller. The Internal Revenue Code is full of complexity and what benefits the seller (a stock deal) hurts the buyer tax wise. The true stock deal provides the seller with capital gain treatment and denies the buyer what is known as a step-up in the tax basis of the assets acquired denying the buyer of tax deductions going forward. The asset deal requires the allocation of the purchase price to the assets being acquired which generally results in the buyer receiving an increase in the tax basis of the acquired assets to be deducted by the buyer as depreciation. The stepped-up basis enjoyed by the buyer requires the seller to recognize ordinary income tax treatment.
At Cavitch, we would welcome the opportunity to discuss your potential sale or purchase, give us a call.