If you are considering buying or selling a business, you’ll want to be familiar with potential legal issues that may arise, including valuation, how the transaction will occur, allocation and taxes, and more. Consulting with a business attorney well-versed in these matters is a smart first step.
As you begin to consider a sale or purchase of business assets, be sure to insist that all parties involved sign a confidentiality agreement. This protects the seller’s proprietary information and rights. Once this has been handled, you’ll want to begin the valuation of the assets. A sale of assets should list specific assets and liabilities, as well as include language that no other liabilities are being consumed. This list is often attached to the purchase agreement.
Ways to Value a Business
There are several ways to value a business and the particular method used is often negotiated among the parties. For instance, you might utilize a market-based evaluation, which is based on the sale prices of similar businesses in the area. Another method is asset-based valuation, which focuses on the book value and liquidation valuation of the business. These are often considered the minimum valuation amounts, as they typically do not consider the “goodwill” of the business. Finally, the parties might decide to use an earnings-based evaluation, which takes into account historical financial figures, such as debt payments, cash flows, and revenues.
Taxable vs Tax-free Transactions
Another consideration is the type of transaction that will occur, which will either be taxable or tax-free. In a taxable transaction, the seller must pay income tax to the extent the consideration (payment for the assets) is greater than the tax basis of the seller’s assets. The buyer receives a “stepped up” basis in the assets or stock. This has numerous advantages, including that the buyer may benefit from bigger depreciations and amortizations for the cost of appreciated buildings, equipment, and intangibles, and that little or no income will be recognized when the target collects receivables and sells inventories. In a tax-free transaction, the main consideration is not money but stock. This type of transaction generally occurs when two companies merge. The seller benefits from a tax-free sale of stock, whereas the buyer buys the seller’s low tax basis.
Other considerations involve the allocation of sales tax, who will be responsible for existing liabilities, and whether there will be indemnification in the event of litigation arising out of transactions occurring before the sale.
For more information on the sale or purchase of business assets, contact experienced business attorney Drew E. Pomerance today.
