Discussion 3

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Jan 9, 2024

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Discussion 3 Hi all, Reviewing the article "How to Structure the Purchase or Sale of a Business," there are two ways to acquire a business: purchase company stock from shareholders or buy the company's assets from the entity itself. Both scenarios have pros and cons, and it is essential to understand and evaluate the significance of both. Purchasing a simple stock sale would involve fewer documents and a minor headache than an asset sale because you would typically need to execute one bill of sale. Stock sales are a better advantage for the seller than the buyer. If the shareholder is selling the stocks for a higher price than what they were initially purchased for, the IRS recognizes the income as a capital gain and could lower the tax rate you would be taxed. A buyer of a stock sale should avoid acquiring an entity that is subject to pre-sale liabilities. The buyer should seek certain legal documents, including detailed requests and terms, when buying stocks from a shareholder, as these specific requests will protect a buyer from some of the risks. The seller's warranties should be in writing and meet explicit specifications, as well as an indemnification agreement requiring the seller to reimburse any extra cost that doesn't fulfill the promises. Additionally, a payment schedule between the buyer and the seller for making installments over the allotted time should also be drafted. Asset sales are what a buyer would generally prefer. Though the buyer would probably share control of the business directly with the stockholders, the stockholders are responsible for the entity's pre-sale liabilities. The tax outcome would be an advantage for the buyer. An asset sale positively affects the buyer's "basis" in assets attained, as the basis is the value tax law assigns investment property to determine the investors' gain or loss on a property transfer. As the buyer, you would have better control over the liabilities expected. If the company is a C-corporation with an asset sale, you will have to worry about the double tax. Additionally, a multi-asset purchase can be more transactional complex due to the number of documents involved. The decision to structure a deal as a stock sale or an asset sale is usually a joint decision by the buyer and seller. For a variety of legal, accounting, and tax reasons, some deals make more sense as stock deals, while others make more sense as asset deals. Often, the buyer will prefer an asset sale, while the seller will prefer a stock sale. Nevertheless, asset sales and stock sales lead to the same results; however, certain legal, tax, and accounting issues make this decision important. (WSP, 2022) Valuation Director John Stevenson (2019) at Mariner Capital Advisors notes, "Based on an analysis of marketplace transactions from the Pratt's Stats database, approximately 30% of all transactions were stock sales. However, this figure varies significantly by company size, with larger transactions having a greater likelihood of being stock sales." Additionally, according to Morgan & Westfield (2021), "if the value of a business is less than $50 million, chances are the deal will be structured as an asset sale."

Regards, References Morgan & Westfield. (2021, December 31). Asset vs. stock sales . Morgan & Westfield. Retrieved January 18, 2023, from https://morganandwestfield.com/knowledge/asset-vs- stock-sale/ Slinde Nelson. (n.d.). How to structure the purchase or sale of a business . Slinde Nelson. Retrieved January 18, 2023, from https://www.slindenelson.com/articles/how-to-structure- the-purchase-or-sale-of-a-business/ Stevenson, J. (2019, July 1). Asset sale vs. stock sale: What's the difference? Mariner Capital Advisors. Retrieved January 18, 2023, from https://marinercapitaladvisors.com/resources/asset-sale-vs-stock-sale-whats-the- difference/#:~:text=An%20asset%20sale%20is%20the,liabilities%20are%20the %20primary%20concerns . WSP. (2022, October 26). Asset sale vs stock sale . Wall Street Prep. Retrieved January 18, 2023, from https://www.wallstreetprep.com/knowledge/asset-sale-vs-stock-sale/ Hi Karen, Great discussion post! I will touch on a few more details regarding stock transaction and asset sale as methods for selling a business. A pro for a seller in a stock transaction is single taxation due to shareholders paying capital gain tax. A con for stock transaction is the carry-over tax basis for the buyer results in substantially less tax benefits for buyer. A con for the seller in an asset sale is the double taxation of C- corporations. Also, stock transactions require permission from the state and federal securities as they must comply with tax laws and regulations, while asset sales do not require any re-titling or renaming company assets. The pros for asset sales are for the buyer, there are positive effects on the buyer's "basis" in the assets acquired. "With an asset transaction, goodwill, which is the amount paid for a company over and above the value of its tangible assets, can be amortized on a straight-line basis over 15 years for tax purposes. In a stock deal, with the acquirer buying shares of the target, goodwill cannot be deducted until the stock is later sold by the buyer" (CFI Team, 2022). The cons to the asset sales that are different are that "The tax cost to the seller is typically higher, so the seller may insist on receiving a higher purchase price" (CFI Team, 2022).

Regards, Melissa Nguyen Reference CFI Team. (2022, December 6). Asset purchase vs stock purchase . Corporate Finance Institute. Retrieved January 22, 2023, from https://corporatefinanceinstitute.com/resources/valuation/asset-purchase-vs-stock- purchase/ Hi Trish, I enjoyed reading your discussion and noted many similarities we both shared. However, I noticed your post does not touch on the cons of each method. For example, the cons of stock transactions are that the buyer doesn't get "the "step-up" tax benefit nor the advantage of handpicking assets and liabilities" (CFI Team, 2022). In addition, goodwill is considered non- taxable due to "when it exists in the form of a share price premium" (CFI Team, 2022). The cons to the asset sales that are different are that "The tax cost to the seller is typically higher, so the seller may insist on receiving a higher purchase price" (CFI Team, 2022). Regards, Melissa Nguyen Reference CFI Team. (2022, December 6). Asset purchase vs stock purchase . Corporate Finance Institute. Retrieved January 22, 2023, from https://corporatefinanceinstitute.com/resources/valuation/asset-purchase-vs-stock- purchase/

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