Selling A Business In Washington State
Posted: Mar 26, 2019
By: Washington State Business & Real Estate Lawyer William O. Kessler
Several months ago, we published an article discussing the general process of buying and selling a business. This is a further discussion and includes other issues. There are many details to address throughout the sale process, and discovering these details proves difficult without the assistance of experienced legal counsel. At Beresford Booth, we provide this experienced counsel which the closely-held business owner needs to ensure an efficient sale. Our experience allows us to walk you through the whole process and provide you a deeper understanding of the transaction: the transaction’s structure and tax implications of each structure, the pitfalls we help avoid, and counsel through the completion of the sale.
Transaction Structure and Tax Implications
When a buyer and seller negotiate the structure of the transaction, there are generally two basic sale options: a stock purchase / membership-interest purchase, or an asset purchase. Both structures have pros and cons, as well as unique tax implications. As an example, we can use a crane manufacturing plant to demonstrate the differences between the two purchase-and-sale structures.
In the stock purchase and sale of a crane manufacturing plant, the ownership interest in the plant is being bought and sold. Within this structure, the buyer and the plant owner negotiate the transferring ownership interest as well as the effect of transfer in ownership on the plant operations. The buyer should perform extensive due diligence because the buyer takes responsibility for ALL assets and liabilities, whether known or unknown. This remains one reason why sellers prefer stock purchase and sale agreements: stock structures do not alter the assets or liabilities of the entity being sold – hence a great deal of risk and responsibility lies with the buyer. From a tax perspective, the capital gains tax responsibilities lie with the seller. Additionally, the buyer, in certain circumstances, may be able to avoid paying transfer taxes.
For this crane manufacturer, contrast this stock sale with an asset sale. The asset sale structure allows the buyer and seller to negotiate the specific assets and liabilities being sold while not altering the transferable ownership interest of the entity. In our example, the buyer would be able to choose only the specific machines, leases, inventory, loans etc. that the buyer wants to receive. The buyer’s due diligence lies specifically with the assets and liabilities the buyer is willing to accept. For this reason, many buyers prefer asset purchases to stock / LLC membership-interest purchases. The tax benefits and costs of asset purchases differ from those of a stock purchase. Buyers in an asset purchase can obtain a tax deduction for the depreciation and amortization of the purchased assets. Additionally, asset purchase “goodwill” acquired by the business can be amortized. However, buyers may be subject to transfer taxes.
Pitfalls to Avoid
One of the biggest problems we encounter in business sales is overzealous and overhasty business owners. On one hand, a business owner can be forgiven for being excited at the potential of selling his or her business. On the other hand, problems arise when that excitement turns to action before consulting legal counsel. Business owners desiring to sell their business often come to us with a signed letter of intent asking about the next step in the process. Unfortunately, a signed letter of intent can hamstring negotiations, even when it purports to be non-binding. The most important aspects of a purchase and sale agreement (i.e. the price, transaction structure, and timing of the deal) are discussed early in the negotiating process, prior to signing a Letter of Intent. That is exactly when buyers and seller should contact their lawyers: early in the process, before the LOI.
Another issue we sometimes encounter when counseling individuals in the sale of their business is a general lack of preparation on the seller’s side. A lack of preparation forces the parties to wait for relevant information. Wasting time can hobble negotiations. To prevent these issues, a process exists to prepare a business for sale, and we have extensive experience in walking business owners through the arduous but necessary sale-preparation process.
Service Beyond the Sale
For nearly every business sale, the necessity for competent legal counsel does not end after the business sells. Sometimes small legal issues remain, such as interpreting and negotiating an employment or severance agreement. Many business owners who sell their businesses cannot wait to get back into the fray and try their hand at something new. Whether you are selling your business, reentering the business-ownership arena, or anything in between, the lawyers at Beresford Booth can be the competent legal counsel you need. Our years of experience guiding buyers and sellers allow us to provide the resources you need to close your business purchase and sale transaction.
Beresford Booth PLLC (425.776.4100), www.beresfordlaw.com.
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