HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS: “Sale Structure – Asset Sale” Pros and Cons
By Ralph Fain

Ralph Fain is a principal in the brokerage firm, R/Fain Group. Mr. Fain also has over 20 years of broad business experience with Fortune 500 companies. R/ Fain Group is a professional business brokerage firm which confidentially represents the interests of various sellers and buyers. Each week Mr. Fain will give tips on Business Brokering, and how to sell your business.

We have discussed in our latest series of articles the 3 or 4 common “earnings” figures which are utilized in “multiples” and business valuations and the impact of “multiples” on the asking or sales price of a business. We now change our focus somewhat to look at how the structure of a sale can have a material impact on that same process – i.e., the determination of the asking or sales price of a business.
There are two primary ways for companies to be sold or purchased – these are via asset sale or via stock sale. These are two very different methods by which companies are sold and, accordingly, there are pros and cons to each depending upon whether you are the buyer or the seller. As our space is limited, we will review asset sales first and will discuss the differing impacts depending upon your role (i.e., buyer or seller).
An asset sale is exactly what the name implies – it is the sale of all or part of the assets of a business or company (e.g., inventory, equipment, land, etc) and, in some instances, may also involve the assumption of certain liabilities by the buyer (at the buyer’s option). Depending upon your role – either buyer or seller- there are plusses and minuses to this type of transaction. We will first assume the role of the seller and discuss the pros and cons from that perspective.
From a seller’s point of view, the primary advantages of an asset sale are
- Continuation of the corporation (since only assets were sold, the corporation can maintain its existence)
- Assets and rights not sold in the transaction remain the property of the corporation (e.g., licenses, patents, copyrights, etc)
- Retention of the corporate name (again, if not sold or transferred to the buyer)

From a seller’s perspective, the primary disadvantages of an asset sale are
- In the sale of assets by a “C” corporation, there is double taxation – once at the corporate level and again at the shareholder level when (and if) the corporation is liquidated. Note that there is not this problem of double taxation with an “S” corporation (unless there are “built in” gains).
- Asset sale is a more complex transaction for both seller and buyer.
- Various types of losses and gains (capital and/or ordinary) are generated due to asset classifications
- Asset sale generally requires bank or lending institution approval (assuming indebtedness by seller)
- Asking price, due to complexity of sale, due to possible double taxation, and due to ordinary income treatment of certain gains is generally higher than sales price for stock sale

Having a basic understanding of the pros and cons of an asset sale (from a seller’s perspective) will enable the seller to be better prepared during the entire sales process with the buyer. Better yet, working with a professional broker who possesses this and other pertinent and valuable knowledge will save you, the business owner, much time and money.
See you next time in this same space for our next article – the pros and cons of selling a business via a “stock” sale. As always, should you have any questions or require additional information please feel free to contact the R/ Fain Group at 832-646-0832 or via our web site.