Closely Held Business Owners Long Term (exit strategy) Goals
Tax efficient choice of entity (short term).
What do they want to use for an exit strategy?
How does choice of entity affect your exit strategy?
Consider that if there is a contract right if they equity not assets are sold, the contract right may carry over to the buyer. If the assets are sold it might not. A lease might be an example. For television business the FCC will have to approve the sale so it may not provide any benefit, so the answer will depend on the particular contract rights involved.
A buyer typically wants to buy assets to get a step up in income tax basis based on purchase price and purchase price allocation. If a buyer purchases stock in a C or S corporation the basis in the stock is what you paid for the company but there is not step up on the assets of the company. In a C corporation there may be a double tax on sale.
With an S corporation you might have a basis step up in your stock from the sale of assets so that you may avoid the double tax when you liquidate the S corporation itself. In a C corporation you cannot obtain that benefit.
If you purchase stock, there is also the risk of the liabilities of the acquired company. While agreements have indemnifications there is still a risk and the due diligence is greater.
There is a tendency in the market for buyers to buy assets.
With a partnership can buy the partnership and make a 754 election and obtain a step up in the underlying assets of the partnership. Similarly, if the owner dies with a partnership interest it will qualify for a 754 election and if passed on to children, they will also get a basis step up.
Depending on the industry there may be a more common use of assets sales versus selling of entity interests.
Our Consumer Webcasts and Blogs
Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.