Buying or Selling a Business
Buying or selling a business is a transaction that involves enormous and complex issues that demands the guidance of a qualified Woburn business lawyer. The following is but an overview of some of the most important issues to be considered.
• How much is the business worth?
• Do I buy or sell assets?
• What if the business has shares of stock?
• What are the tax consequences of the transaction?
These questions are too complex to answer briefly, but if you are considering buying or selling a business, our Woburn business lawyers want to help you begin to consider the issues involved before you prepare to consult with an experienced business lawyer.
How much is the business worth?
Assuming a business is to be sold at its fair market value, a glance at the definition of that term is a starting point: the Internal Revenue Service (IRS) defines fair market value as:
“the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”
That’s basically something like saying a business is worth what the parties think it’s worth. Some parties use formulas: EBIT (earnings before interest and taxes) and EBITDA (earnings before interest, taxes, depreciation, and amortization) focus on earnings; some look to one or more years of revenues; others look to a P/E ratio. Then there’s the “gut feeling” approach, which is not to be deemed frivolous.
Should you buy/sell assets?
An asset purchase offers the buyer the advantage of “cherry-picking” the business, by only acquiring those assets the buyer feels are desirable to carry on the business. The buyer thereby avoids assuming liabilities, or just assumes those that the buyer believes are best for the continuity of the business. The seller, therefore, remains liable for all unassumed liabilities of the business before the sale, such as product liability, employee claims, customer claims, etc.
Or should you buy/sell stock?
Put simply: the buyer writes a check and the seller signs over stock certificates. All the assets and liabilities remain in place; the only change is in the ownership of the shares. In a stock purchase, the buyer acquires the entire business entity, and significantly all its liabilities.
What are the tax considerations?
The tax consequences of buying or selling a business are too complex to go into any detail other than to say that generally sellers prefer to sell shares and be taxed at lower capital gains rates; gains on the sale of assets might be taxed at higher income rates and if the seller is a corporation a double tax can apply. (S corporations generally don’t involve a double tax.) The opposite applies to buyers who prefer to buy assets whose value can be stepped up to equal the purchase price, which the buyer can then begin depreciating.
If you are considering buying or selling a business, you can turn to our Woburn business lawyers for specific, in-depth answers to these and other matters as they pertain to your situation. Call our Woburn business lawyers today at (781) 674-2562 to learn how we can help you!
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