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Buying or Selling a Business - Asset Deal v. Stock Deal

We often have clients looking to buy or sell a business. It is not uncommon for the parties to negotiate the basic terms of the deal before involving our firm, or the accounting and financial professionals. A common problem we encounter is that parties negotiate a purchase price, and nothing else. The structure of a business acquisition is very complex and involves a lot more than just the negotiation of the stated purchase price. In fact, the structure of the deal as an asset deal or stock deal (or interest deal, in the case of an LLC) can have a drastic impact on how much of the negotiated purchase price ends up in the pocket of the seller, as well as how much liability may augment the amount of the purchase price paid by the buyer.

I found this very simplistic article on Bizquest which outlines the most basic concepts of the deal structure. What the article does not delve into are the tax consequences of the different structures. Capital Gains tax rates may be as much as 20% lower than ordinary tax rates for the seller. Do you know which structure will get you the Capital Gains tax rate and which will make the gain on the sale ordinary income (or some mix of ordinary and Capital Gain)? Do you know the tax difference between buying an asset which has been fully depreciated for income tax purposes and buying the stock of a corporation that owns that fully depreciated asset? The differences can make a huge difference in the finances of the deal.

Beyond the financial and tax differences, the way the deal is structured can be significant in the allocation of risk between the buyer and seller, which is the primary function of our firm when assisting in the negotiation of the deal details.

There are a lot of nuances to buying or selling a business and some of those nuances are state specific, as the laws governing these transactions are typically specific to the state in which the parties reside or do business. It is important to get your tax, financial and legal advisers involved in the negotiations at an early stage. If you are thinking of buying or selling a business in Michigan, call the attorneys at Penzien & McBride, PLLC to see how we can assist in the transaction.

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