Deal Structure: Asset Purchase vs. Stock Purchase

In this episode, we explore the key differences between two main deal structures in business transactions: asset purchases and stock purchases. Learn how each structure can impact the sale price, liabilities, and tax consequences, as well as how the buyer's goals, financing options, and industry specifics play into the decision. Understanding these details is crucial for both buyers and sellers to create a deal structure that aligns with their priorities and maximizes the value of the transaction.

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TRANSCRIPT:

Welcome to Integrated Insights with ICCG. For more than 30 years, our team has

partnered with small business owners to prepare for and navigate the business

transaction process. Pull up a chair as we share stories and insights from our

experience on all sides of the M &A table. Welcome to another episode of Integrated

Insights. My name is Michael. I'll be your host today. I have the co -founders of

ICCG here with me today, Grant and Dave. Today, we're going to be talking about

deal structure. So to get started, what are the different types of deal structure?

Yeah, that's a really difficult question to answer very simply, but just to over

-generalize, there are generalize, a lot of times there's a stock purchase or an

entity purchase, like you're buying the actual shares of the company, and then on

other times there are the purchase of assets, meaning the actual workings inside of

that entity. And so we generally refer to those two as a stock purchase or an

asset purchase. And just to clarify, the asset is not just buying the machines, it's

buying all the assets like counter -receivable, it's like you said,

it's the workings of the company. And beyond that, the structure can include the

time and the extent of the proceeds. So you could roll some ownership over to the

new company, you can wait to get the proceeds because there's an earn out.

In other words, there's a contingent proceed on some sort of performance metric. So

if sales remain at this level, then we'll give you another million dollars in a

year or whatever it is. And so the structure is, it's a little over simplistic to

say there's just two types and you just get to choose two options. There are

multiple nuances to it. Can you give just a simple example of how structure can

affect the outcome of a deal?

Yeah, I mean, you know, there's obviously tax consequences, right? So if you sell

stock in a corporation, you generally get capital gain treatment.

If you sell assets out of a corporation or if you sell an LLC,

which it doesn't matter whether you sell shares or assets in an LLC, it's basically

treat as an asset sale, then you don't get capital gain treatment on any or on

most of the proceeds unless there is a pass -through entity involved where there's

goodwill. So all that to say, there's higher consequences in in some structures than

others and you have to you have to plan for that but there are other consequences

too because if you buy the assets of a company then a lot of times it doesn't

come along with the licensing or the contracts or you know those kinds of things

and so and so you you're tempted to buy the actual entity itself because then you

get to a lot of times assume all those things. And then the third real big bucket

is that if you buy the entity, you assume all the liabilities of that business

where in an asset purchase, you generally don't assume any of the liabilities

existing in the business. Okay, so you ended there talking about some of the

liabilities and that's kind of some of the downsides. What are, can you focus a

little bit more, what are the advantages of buying the corporation or the entity?

Well, years ago, Dave and I were in an industry that had municipal contracts and

it's very difficult to gain a municipal contract unless you are the incumbent.

The city or county that you work for, the state that you work for is very slow to

change. And so when we went and we bought some of those businesses, a lot of times

we were very tempted to buy the actual entity itself because it came along with the

designation or the contract that went along with that municipality.

And so those are, that's the biggest one. Dave, do you remember any other time

where we've been tempted? Well, it's, I mean,

there are times where we can't quite get

The net's not quite working out the net net net which I know we'll get to in a

little bit But and I think that we've just been able to go and there was such a

tax advantage to us selling the escort for instance or the The the stock that we

were just really open with the buyers coming out of the gate saying look, you know

You're gonna get a little bit better price on this

But you know, it's going to be a it may not be that advantage, but the price may

be an advantage to you. Yeah. Yeah. I mean, if the buyer is more agnostic about

whether they are buying shares or stock than buying assets,

a lot of times we see that in Texas because you've got out -of -state companies that

want to be in Texas, but they need some sort of base, a Texas corporation anyway

to operate in Texas and a lot of times there's an advantage when you're thinking

contracts especially where we've been around for 30 years. It's a lot easier to get

a contract than saying, "Oh yeah, we're a brand new corporation." Then you've got to

explain you're a survivor or you're assuming the contracts and it's more difficult.

I say all that. It just depends on everybody's priorities and we always know what

the buyer is wanting to do and what the seller is wanting to do and the idea is

to marry them and the option is to change the structure in order to make it

palatable to both parties.

We had one deal specifically where we had three different locations of the same type

of industry, and they were new coming into Texas,

just like you said, they needed an established entity, so they bought the entity for

one of the locations, and then they used that entity to buy the assets of the

other two locations, Which was kind of the best of both worlds for them and for I

think the sellers in this case ended up being a pretty good Pretty good thing and

that was what you would commonly call a regulated industry And so that's why that

licensing is super important That's why the the the length of existence or the time

that those companies have been in existent It didn't matter on the second two

purchases. It really mattered that they had one that ended up being,

okay, it's been around for a while and it's established and so they bought this

stock of the one and then the assets of the other. There's also some outlier

reasons for, I mean, I guess you wouldn't do it for this reason but there are some

advantages, Grant you would know a little bit more about this than I would but some

of the modifiers on the employment tax or the unemployment tax and things like that.

The modifiers are working for workers comp and things like that. If the company's

been around for a while and they've got good modifiers, that's another reason because

they're not having to start over with that model. Yeah. And the unemployment tax as

well. I mean, it does. The rate varies tremendously. In the old days,

there were some advantages to buying a company, a stock of a company that had a

net operating loss carry forward. So there's some tax considerations.

But any more, we're coming across companies, Michael, you and I were dealing with

one the other day where there's retained earnings in that corporation, C Corp. Retain

Earnings. And so at some point, okay, so that guy sells the assets of the

corporation, he takes out all the cash, but he's got Retain Earnings inside the

company. And in order to dissolve the company,

he has to pay tax on the dividend of the Retain Earnings that he takes out.

So all that to say is not just the tax on the proceeds of the sale of the assets

that you have to deal with, but when you dissolve that corporation because you're

done with it, there's more tax to be paid. So I sound like the tax is a major

consideration, but it's part of the consideration. Yeah. And Michael, this is why

Grant and I have been business partners for so long because I don't have to know

all that stuff he does. And So I let him memorize all that. But honestly,

that's the advantage to having someone who understands tax law and tax accounting at

the table. - The deal that he's talking about where we sold the stock of one that

then bought the assets of the other two, we were representing all three entities.

That was not just a knowledge of tax law or knowledge of the rules,

but that's us sitting around a conference table and Dave throwing out creative

solutions to the other problems that existed with regards to licensing or whatever.

And then collectively, you know, our team comes up with a possible solution and we

see that time in time again. And that's why, you know, we, we put a huge emphasis

on the structuring of a deal because it has to maneuver through everybody's

expectations that are sitting at the table. And, and quite honestly, Dave and I love

those conversations because we all get to throw in our two cents and nothing's a

dumb suggestion. Well, We won't say nothing is a dumb suggestion but but we try to

think creatively out of the box and and and not all of the people that typically

serve our clients are capable of playing the what ifs.

That's great and I think I think what you guys just kind of went through there in

the back and forth was it really helped to show the variation that you can see,

right? That every deal is really different, and there's different solutions for

every-- and multiple solutions to every problem. And like you said, Dave, it really

highlights the fact of having someone that has that tax accounting background, and

like we do at ICCG. One thing just to kind of sum it up and to go back to kind

of the high level points that you made is basically what you're And so assets, like

you might get a lower price, you're getting the equipment that you need. You're

getting what you need to run the business, and you're not assuming the risk of the

entity. But what you're giving up by not going for the entity instead is you're

giving up potential relationships and established business and some of those things

that you would that would be really helpful in kind of immediate success. Does that

sum it up pretty well? Well, I think it's an overgeneralization and that's really

why you said, which is correct, every deal is different because the goals and

anticipated value that the buyer has are very different every single time.

And so the seller needs to meet the expectations of the buyer as much as the buyer

needs to meet the expectations of the seller, and that's where you structure it

accordingly. Because to some buyers, it's always a stock purchase.

Particularly when you talk about foreign buyers, European buyers,

they're looking at stock purchases. And When you're dealing with strategic buyers,

they've already got their company, they're already established, they're coming in to

buy another place. They don't want your liabilities. They're probably going to limit

their offer to a-- unless there's contracts involved that they really care to keep

in play and they don't feel like they can assume those contracts or licensing,

they can generally do an asset purchase. Yeah. And one thing I just want to kind

of double click a little bit on what you just said, Michael, was that kind of that

blanket statement, if it's an asset purchase, it's going to be less, it's less for

price. Not always. I mean, the sales price oftentimes is with the sales price, but

it's the net, net, net. And we didn't cover that and we've covered that a lot in

some of our other podcasts. But really, at the end of the day, you know, someone

can sell, we've sold companies for less, but it was a stock purchase. So the net

net net was actually more. And again, that's just, is that correct or not? I mean,

that would, there doesn't always work like that. But you know, sometimes that would

be a win -win for both sides.

And again, it's just different, it's, it's kind of the different, you know, we've

talked about the different types of intermediaries, and I don't want to put everyone

in the same bucket or whatever, but there are a lot of people out there who are

trained just to broker a deal and basically find a buyer and turn it over to the

attorneys and walk away and go to the next one. Then that's just a very, very

different job than what we would do as intermediaries. We're going to walk with

them, help them structure. We

We want their next business 20 more years down the road and they saw their next

business. Yeah. And I think the one item we haven't spoken about or the influencer

on the structure of a business is the lender of the buyer.

So a lot of times the bank is going to prohibit maybe a stock purchase or is

going to not not have, especially now that SBA programs are,

you know, all over the planet. I mean, there's huge SBA limits now. And so,

you know, those larger, you know, five million dollar loans that you see coming out

of the SBA, a lot of them don't like certain things.

They don't like the real estate outside of that entity or they or they don't want

you to buy stock. They want you to buy assets. And again, banks have their

preferences. And so, you're kind of constrained by your lender.

So on that note, when you guys are talking about all the different options with a

client, a seller, or a buyer, whatever side, do you have all that kind of lender

knowledge upfront for the most part? Or is that something where it's like, "Hey,

we're going to have to come up with a few different options because we know some

of these are going to be determined by whether or not we can get financing." If

we're on the buyer side, we certainly know. But when we're looking for buyers for

our clients that are on the sell side, we're constantly asking the buyer to make

sure that the particular structure that they're proposing in the LOI is approved by

their financing source. I think we have our,

I mean, look, we've been around a lot of banks and so there's some that we just

know that don't like certain deals and so we'll double click on it but we're never

going to assume that a bank is not going to change their mind. Has it ever

happened where an option was determined or a client was looking for a specific type

of situation? But then the buyers that came to the table, the potential buyers that

came to the table, maybe no one was the perfect fit. So that option had to change

or shift a little bit to maybe switch to a different buyer that was the closest

fit?

Um, you know, again, our, our assignment a lot of times,

uh, includes several priorities from the, from the seller. And one of those

priorities is that the buyer meets the net net net goal or expectation of,

of, uh, you know, the seller, um, gets what he wants basically.

Um, there are basically. There are other things. I mean, I just got off the phone

today with a potential buyer of one of our clients,

and culturally, they're just an incredible fit.

Now, there's another buyer at the table that's not quite culturally fit,

so you want to see, okay, how much does that extra million dollars mean to your

client, right? Because he says culture is really important, but what happens if the

guy that is not a culture fit is going to pay you an extra couple million dollars?

Well, then, you know, maybe you don't worry about culture as much. So, but we're

always trying to meet all of the It's not just the net, net, net, but that's table

stakes to, you know, the other kinds of preferences that the seller has.

Well, we're winding a little bit talking about the advantages and that kind of

thing. So why do buyers a lot of times want to buy the assets? Well,

the biggest reason is so they can write it off. Because if you buy stock, you're

not depreciating assets. But if you buy the assets, then you are going to pay less

taxes because you're writing off the asset purchase that you that you made but

Perhaps the biggest legal reason is is that there's there's not the assumption of

the liabilities That of the corporation and so there is an exception and it's a big

one And I would say it has a lot more teeth in Texas, but we spoke recently about

a similar situation in another state. In fact, Dave and I were on the phone

yesterday talking about it, but typically sales tax or state tax is some state

taxes, but in Texas we have just sales tax.

It is, it goes with the assets. And so if you buy a business and they have a,

you know, they've either misreported their sales tax, we see this a lot in the

construction industry, or they just haven't filed their sales tax, we saw that in a

service business recently as well, then if you buy that business or the assets,

you think, oh, the liabilities don't transfer, yes, they do for the sales tax. And

so you inherit inherit that and have to pay it, and then,

of course, the indemnification in your asset purchase agreement allows you to go

after the seller, but by that time, the seller is in the Bahamas. Yeah.

That's why you'd better do your diligence before that. That's right.

So if buyers often want to buy the sets, how do you get them, if you have a

client that's wanting to sell the corporation and that's their strategy that they're

going for, how do you, I know we already talked about contracts and relationships

and stuff like that, is that the angle that you take to get them to buy the

corporation or is there a different strategy? We use waterboarding. Okay. No.

All right. Moving on next question.

No, look, I mean, you know, this is, And look, this is the art,

right? It's helping the buyer see the value in doing it your way.

And then, obviously, the value to the seller to change is that you're finding a

willing buyer that's a good match. But it is an art.

But you've got to know what you're talking about because a lot of people draw

really dark lines and they won't move.

As you've just gone through, there's so many variables and so many pluses and

minuses. What you've got to do is mitigate for the minuses and make sure that you

get more pluses than minuses, right? I'll just say this, and this is so important

for business owners to understand. This is why you don't wanna just have a bean

counter, because it's more than dollars. It's more than a simple formula.

I'm gonna pay you $10 million for your business

and then you go away into the sunset. But there is so much more to it.

And structure is a huge part of that, but only because of the other things that

are involved. I mean, there are employment contracts, there's leases on real estate,

there's structuring all of those things. We're dealing with one deal right now where

the lease is way over market. And so how do you mitigate that from a buyer's

perspective? You're going into buying business, you're going to assume the lease

because you want to have an office to office out of, but the rent is 2X what

market is. So what does that do to the purchase price? How can we get around this

really high rent and not penalize both the buyer or the seller?

So we probably have some listeners Just before we wrap up, I'm sure we have some

listeners that are listening to this episode and thinking, "Man, I have more

questions than answers right now." I hear what you guys are saying. I hear that

there's a ton of different structure options and a ton of different situations when

approaching a deal, but I still don't really know what's the best structure to

approach when I want to do a

And some of those same business owners, some of those same listeners might also be

thinking, hey, I'm years out from a sale. Why would they need to come and talk to

us now? Why would they come sit down at the table with ICCG? - Because structure is

everything. And that's just going to make their life easier. So some people think

they know what they're doing. They run great businesses. They're super, super smart

about what they do. But when it comes down to this, we find that, hey, if you've

never done it before, it looks like we can't go run their business like they do,

but we can sure help them structure a sale. And so if they get ahead of this,

there's lots of tax reasons for that. They might need to change from a C -corp to

an S -corp. That in itself is a five -year process. And so there's reasons to do

that. And a lot of times it's just taking the initiative, letting down the pride a

little bit and saying, you know, this isn't something I know. but if you want to

maximize the sale for your business owner and you want to maximize the sale of your

company, I would highly recommend you sit down with someone who knows what they're

talking about. It's a free consult for us. Michael, I've got a spaghetti diagram on

my white board in my office because this guy didn't come see us five years ago and

we're trying to get around almost an impossible tax situation. And if Dave and I

have had one, you know, crazy recurring conversation with business owners,

it's man, I wish you'd come to CS a few years ago. And so we have this tagline

at ICCG, come sit at our table, You know, we don't charge by the hour.

We want to help people and a lot of times we can't help them as much as we could

have if they came to and sat at our table a few years before.

- That's great. So yeah, anyone that's listening, the things say, I think I might

want to sit down with ICCG. The best way to do that, our email is in our show

notes, just shoot us an email and we will send you an NDA so that we can talk

about that, get a couple of years financials from you and then schedule a meeting.

So we'd love to do that. Like Dave said, it's a free consult for us. So that's

that's at no cost to you. So that's all the time we have for today. Grant Dave,

thanks for sitting down with me.

And that wraps up another episode of Integrated insights with ICCG. Be sure to

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