Buying a business for your daughter – Assets or shares? | Gray reed

On Father’s Day, Morgan Bux celebrated with his father Big Daddy Bux and asked him to team up with her to purchase Green Earth Air Conditioning and Heating, LLC in Buda from retired Green Earth owner Gaia. Morgan suggested that Big Daddy invest her legacy in Green Earth and work with her to grow the business as part of her own retirement and estate planning. Big Daddy’s tax and estate planning lawyers have come up with a plan. Morgan’s business consultant recommended forming a Green Earth advisory team to support them after the purchase and developed a long-term plan for leadership growth and business expansion. To complete the purchase, does Morgan have to purchase Gaia’s assets or stake in Green Earth Limited Liability Company? Often, buyers prefer to buy the assets of the business while sellers prefer to sell the shares / holdings in the whole business. Why is that? What would Morgan and Big Daddy prefer?

A share sale is the purchase of the owner’s shares in a company / an interest in a limited liability company – including possible legal obligations and possible taxes. An asset sale is the purchase of individual assets and liabilities and eliminates all of Green Earth’s legal and tax issues.

Purchase of shares

If it is a stock purchase, the buyer takes legal title to the business entity – the transaction is simpler and more straightforward. Most contracts are transferred automatically and transparently to the new owner. For Morgan and Big Daddy buyers, it’s “what you see is what you get” for both assets and liabilities. Yet, to deal with any fears of hidden liability, the parties will usually have contractual representations and warranties that require each of them to perform certain post-closing conduct and actions – usually enforceable by cash withholdings from the final payment of the purchase which can also be softened by the promise of an additional purchase payment if the business is doing exceptionally well.

Benefits of buying a stock?

Since Morgan and Big Daddy are accepting the existing Green Earth entity – warts and all – no reassessment or title change of individual assets is required. Employees keep their current job in the company and does not need to go through a process of termination of Green Earth and employment by a new entity that only owns the assets. A share purchase also avoids the headache of dealing with certain assets that pose transfer problems due to assignment, legal ownership and third party consent issues – such as intellectual property rights to patents and trademarks. , licenses, leases and permits. The transfer of interest from members of Green Earth presents an easy hypothesis by Morgan and Big Daddy to avoid the tedious process of obtaining consents and submitting new permit applications. However, it should be noted that some contractual relationships have non-transferable licenses and permits which require the specific consent of the third party contracting party to their assignment. Morgan and Big Daddy’s due diligence requires undertaking a careful review of all contracts performed by Green Earth to assess whether any contracts need to be independently confirmed and, perhaps, approved or even renewed. Notably, some contracts with third parties can be more oppressive than beneficial – and when purchasing assets, they can be canceled. That, on its own, might warrant further consideration to recommend an asset purchase transaction rather than a stock / entity purchase.

Disadvantages?

Morgan and Big Daddy will receive little or no tax benefits, such as a “graduated” tax benefit. They get all the assets and liabilities – no sorting. The only solution to dealing with toxic assets and unwanted liabilities would be separate contractual arrangements, for example, for Gaia, the seller, to take personal responsibility for them.

Purchase of assets

If it is an asset sale, the buyer buys certain assets – equipment, licenses, Good will, customer lists and inventory, and the seller retains legal title to the entity. The seller keeps the money in hand, pays the non-commercial debts and delivers the business without money or debt to the buyer – except for the day-to-day money needed to run the business and its operations. seller / trade associated expenses.

Benefits for the buyer?

There can be tax advantages in spreading the purchase price as much as possible over the assets that will depreciate the fastest. Article 167 of the Tax Code provides for a depreciation allowance for certain property from gross taxable income; therefore, the shorter the depreciation period, the sooner the buyer receives the tax benefit. Each type of asset to be acquired in the transaction must be analyzed individually to determine its priority for the buyer – which requires the inclusion of a knowledgeable tax advisor on your team.

The most attractive asset class is inventory and fixed assets. Since assets in inventory can be expensed when sold in the ordinary course of business, thereby reducing the buyer’s gross taxable income from sales, Morgan and Big Daddy would like to allocate most possible of the purchase price. Likewise, fixed assets (like equipment) can pay for itself quite quickly. During this time, goodwill and any non-compete commitment are considered intangible assets and must be cushioned (mainly amortization of intangible assets) over time – typically over a period of 15 years. However, there is critical restrictions on the allocation of the purchase price – Morgan and Gaia must agree to the award, and there is a limitation on awarding the full price to an asset or other blatant misappropriation made solely for tax benefit purposes. As for the values ​​of goodwill and the non-compete agreement, from the seller’s point of view, goodwill is an asset and would therefore generate a capital gains tax that is more favorable for the seller than the non-compete agreement. -competition, which would be taxed as ordinary income at a higher rate. Finally, it is important for Morgan and Big Daddy, as buyers, that they pay close attention to the base allocation of each asset as it must be equal to their corresponding fair market values.

Disadvantages?

To get the employees, the seller has to lay off and the buyer has to rehire them – with all the imaginary challenges and expenses that could well include employment contracts with key employees. Contracts – especially with customers and suppliers – may need to be renegotiated and / or renovated by the new owner. Some assets may need to be renamed. The tax-absorbing seller can charge a higher sale price to get the closing money they want.

Tip the scales in your favor

Whether Morgan and Big Daddy choose to accept an asset sale or a stock sale, could it make a difference to other family members? Of course it could.

While Morgan and Big Daddy cautiously consult their lawyers, tax accountants, CPAs, business consultants and team of advisers, what if their purchase of Green Earth is unsuccessful? Like the father of the prodigal son, does Big Daddy risk giving Morgan his share of the inheritance only to see her fail and beg for more? What does Angelica, Big Daddy’s wife (and Morgan’s mom) think? What about Morgan’s siblings? While it may take longer than a sale of shares, a sale of assets – and its extermination of known and unknown responsibilities and risks – does it make more sense to other members of the? family ? While management and business consultants are undoubtedly a great idea to help Morgan succeed, would it also make sense for Big Daddy and Angelica’s estate planning to consider and address the possibility that the purchase of Green Earth may be? a bad deal – not just for Morgan but maybe for Big Daddy and his real estate as well?

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