Preface: If you’re selling your corporation, you should understand that you need to properly plan that sale to maximize value, and not only price.
Sale of Your Corporation: Assets vs. Stock
Thinking of selling your corporation? Read further. Selling a closely held business requires a team of advisors with business, finance, legal, and tax expertise. A sale of corporate assets should never be driven from one perspective, e.g. highest bidder. Here’s why. Let’s say you have a business valuator appraise the value of your corporation. Maybe the report said it’s worth $3.5m for instance. You’ve worked years to build that value in your corporation, and you should harvest the optimal net dollar; and net dollar is not always the highest bid.
There are two common methods for selling for a corporation. Asset sale, or stock sale. Let’s look at these options in more depth. An asset sale is a sale of business assets, e.g. inventory, equipment, receivables, goodwill, patents….maybe even real estate. You should plan carefully years ahead for the sale of your business, especially if real estate is a corporate asset because of the tax implications. A stock sale is the sale of the stock of your business; the legal certificate(s) that entitle ownership to the entire corporation.
Stock sale vs. asset sale.
Let’s say that hypothetically your business appraiser valued your business at $3,500,000 and you have a $1m building in your corporation, $1m of equipment and machinery, $400,000 of accounts receivables, and $600,000 of inventory, with a stock basis of $2,800,000.
You decide to take your business to the marketplace at $3,500,000. Be cautious, whether your selling for $3.5m, $1m or $10m, you need the right advisors before selling your business for the following reason. Trusted business advisors will help you maximize value, not price. Let’s say you get three bids i) $3,500,000 ii) $3,200,000 and iii) $2,900,000. Easy you say, but the wrong decision, or fasting on your reverse due diligence budget could be costly in this scenario. Suppose the $3,500,000 is an asset sale, and the $3,200,000 and $2,900,000 bidders will purchase stock. If you have depreciated 85% of your equipment and machinery with accelerated methods you will need pay ordinary gains on the depreciation recapture of the difference between cost basis and book basis. Let’s say for easy calculations this tax is 35%. Let’s say you have depreciated only 50% of your building.
In this realistic scenario you will paying approximately $300,000 in tax on the sale of the equipment, and $175,000 on the sale of building in depreciation recapture. In addition, you will have a 1231 gain taxable up to 23.8%, on $350,000 of goodwill, an additional $80k of tax. So, all said, you will have tax of more than $550,000 on the sale of corporate assets. If your business is a C Corporation, you will taxed again on the distribution. In this scenario your cash remaining after tax on the $3,500,000 asset sale could be only $2,950,000; less costs to wind down the corporation.
If you sell stock in your business for $3,200,000 you would have a gain of $400,000 taxable at say 23.8% or $95,200 (3.2m sale price – $2.8m basis.) Your net cash on sale of stock for $3,200,000 would be near $3,100,000 net cash in your pocket. The $2,900,000 bid would result in say $25,000 of tax and a net of say $2,870,000 in your pocket. The net cash on the $3,500,000 bid for assets vs. the $2,900,000 for stock is maybe only $80,000 more dollars in this instance; and the $3,200,000 is bid the net highest; putting maybe $150,000 more in your bank account than the $3.5m asset sale bid.
Summary: When making any major business decision talk with your trusted advisor(s) to obtain the advice that’s in your businesses best interest.