Over the past few columns, I have discussed issues related to selling the family business.
I’ve covered the importance of evaluating your life goals along with the dollars involved in a sale, the value of shaping up the management and financial statements, and the need to leverage expert advice. This final installment will convey a few techniques to optimizing the deal with the buyer.
It is key to understand that the buyer and the seller have divergent interests in the structure of the transaction, most of which revolve around stock and assets. The seller wants to sell stock, and the buyer wants to buy assets. There are a few reasons for this.
Imagine the business in question is a construction or drug company, and is sold. If years after the sale a bridge the company engineered and built collapsed, or a severe side effect was discovered with a drug or medical device the business provided, who is held liable? The answer is the owner of the stock. One of the main negotiation points in selling a business is will it be a sale of stock or assets.
The new owner, if they purchase the stock of a company, becomes liable for any claims against that company for all its previous work. As such, it is in the seller’s best interest to sell the shares of the business to shield it from any future responsibility.
There is another reason why the seller is interested in selling stock. If the value of the company had seen significant growth in the value of its stock over time, a sale of stock would be subject to a capital gains tax rate. With the current tax structure, the capital gains tax rate is lower than the income tax rate. This could translate into substantially greater net value from the sale.
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