Practice Transitions – Buying and Selling a Business (Part II)
Chris Hussey, Tax Senior Manager
In the first part of this article, we addressed matters from the seller’s perspective. This section addresses matters from the buyer’s perspective.
Part II - Practice Transitions From the Buyer’s Perspective
The stock (or partnership interest) is purchased directly from the seller.Buyer Pros
- Use of potential tax attributes of existing entity. For example, if the entity has net operating losses they can be used (with certain limitations) to offset future income of the entity.
- Potentially beneficial intangibles such as an existing leasing and vendor contracts.
- Purchased at a discount as compared to an asset sale due to the tax savings to the owners.
- No step up in asset values. The basis of the assets on the books at the time of purchase stays the same. This generally results in very little depreciation for the buyer, who must wait much longer (potentially until it, in turn sells the company) to recover its purchase cost via any sort of deduction.
- Past liabilities and any potential future liabilities of the entity stay with the entity. The buyer will be responsible for these.
The assets of the selling entity are sold to the buyer.Buyer Pros
- Increased basis in assets. The basis in the assets for the new entity will be fair market value of the assets at the time of the transaction. This could create a much larger and faster recovery period for depreciation compared to a stock sale, thus lowering taxable income of the entity.
- Liabilities of the selling entity stay with that entity. The buyer will not be liable for any past or future liabilities of the selling entity.
- Must create new leases and vendor contracts, which may or may not be an issue.
- Generally involves a higher purchase price due to increased tax impact to sellers.
This is a stock sale with an election made by both parties to treat the sale as an asset sale for tax purposes.Buyer Pros
- This can be particularly appealing if the target corporation has prior net operating losses that can offset the gain.
- This can be appealing if the depreciation on the acquired assets can be recovered quickly (shorter asset lives), generating large depreciation write-offs in the first several years of ownership.
- It may generate a much lower purchase price as the seller will not be directly liable for tax.
- The buyer is liable for the selling entity’s liabilities.
- Potential increased tax burden on buyers as the entity (now owned by the buyer) will bear the entire tax burden on the sale.
This concludes our discussion from the buyer’s perspective.
As with any major financial decision, you should consult with a qualified tax accountant who can help you successfully navigate the transaction, optimize its impact for you, and explain the consequences so you can make an informed decision. The material presented above is merely an overview, and as with all financial, legal and tax issues, there is never just one answer that works for all parties. It is imperative to seek council from both legal and tax advisors in connection with any major transaction to be sure that all issues are discussed and prioritized for your specific circumstances.
If you would like to discuss further, please call Chris Hussey or your BNN tax advisor at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.