The two ways businesses are sold are either using APA (Asset Purchase Agreement) or a Stock or Unit Purchase agreement. The first is the purchase of a company’s assets, the second is the sale of its stock. In small business, a stock sale is usually most beneficial for a seller, while an asset sale is most beneficial for a buyer. Determining the type of sale will have a direct impact on the sale price with an asset sale usually commanding a higher sale price than a stock sale.
In an asset sale, the buyer primarily buys the assets of a corporation with some goodwill or blue sky (based on the history of earnings.) The advantage to a buyer is the ability to allocate the sale price with a high asset base that will allow for a higher future deprecation schedule. In addition, by purchasing only the assets, the buyer does not assume any of the corporation’s legal liabilities.
In a stock sale, the buyer primarily purchases the stock of the corporation. The advantage to the buyer is the ability to buy the total package including contract leases, permits, and licenses that are in the corporate name. The disadvantages as previously mentioned are the legal liabilities and lack of depreciable assets. The tax advantages to the seller in a stock sale are usually significant, which is why most business sellers prefer this method of sale. But it does put the buyer at a disadvantage if he can’t take advantage of depreciation.
Since buying a business goes beyond the financial statements, there are several factors that increase and/or decrease the value based on financial analysis. The most difficult part of convincing a buyer to pay for the goodwill portion of the business can be validated by placing values on intangibles such as employees, company longevity, patents, customer base, and of course, earning or cash flow.
If you are looking to sell your business, contact Peterson Acquisitions for a free consultation.