Volume 1 Issue 3

Nov/Dec 1997

© by Newland & Associates

In the last issue, we talked about "Pain-less Business Purchases," primarily from the Buyer's perspective. This time, we will reverse the roles and look at the Seller's considerations. As previously noted, it makes a substantial difference whether the Buyer opts to buy all of the stock of a business or elects to buy the assets of a business. You can sell either the stock of your business or the assets, but not both at the same time. If a Buyer buys all of the stock, he automatically controls all of the assets.

Most sophisticated Buyers want to purchase assets, as opposed to stock, primarily in order to limit or avoid unknown claims and obtain a higher basis in the assets so the same can be depreciated.

But What If the Buyer
Doesn't Want All of My Stuff?

If the Buyer is already in your line of business, the Buyer may not want all of your assets. Some of your assets may duplicate assets that are already in the Buyer's hands. A Buyer may want all of the assets or only some of the tangibles (machinery, equipment, etc.) or the intangibles (name, customer lists, receivables).

What are the assets and what can be sold? The parties are free to negotiate which specific assets are to be sold. The key is that both clearly agree and correctly identify which specific assets are to be transferred.

The financial terms of the sale can be critical to both sides. Many business purchases are financed by the Seller through taking promissory notes rather than cash for the sale. But suppose you are moving to Brazil and don't intend to come back. In that case, you probably will want the Buyer to pay all cash at the closing, since being so far away makes Seller-financing problematic. Why? If you provide financing and the Buyer later defaults, you could get the business back. That could ruin your extended stay in Brazil as well as the relationship that pulled you there in the first place.

You May Be Asked To Be a Banker

Often, if the Buyer does not have sufficient cash and does not (or cannot) qualify for credit, Seller financing may be requested. Stated differently, you will be asked to be a banker. Unlike banks, many Sellers who provide Seller financing are too cavalier about the terms granted.

If you provide financing by agreeing to take part of the purchase price over time, you become dependent on the Buyer's success in operating the business. But don't assume the Buyer will be capable of running your business just because he put up a large down payment. You may get the business back in shambles. Some businesses have been sold two or three times by the same owner because of successive failures by the purchasers.

If you really want to provide Seller financing, it would not be a bad idea to check out the Buyer's track record. Of course, if credit is granted, during the time payments are being made, you will want to have inspection rights over the assets and maybe even the finances.

Covenants - Employment Agreements

Since Buyers want what they paid for, expect to be asked for a Covenant Not to Compete. This is a promise that you won't open a competing business across the street and siphon off all of the former clients. Such covenants are common and are generally enforceable if reasonable as to time and area.

What if the Buyer asks you for help in running the business and wants to pay you to stay on? There are many pros and cons to such arrangements. You may know the business well as the former owner, but that does not insure that you will get along with the new owner.

Another situation which may arise is the Buyer may want you to consider staying on to receive salary in lieu of an elevated sales price. Salary paid to the former owner is "ordinary income" to the Seller and deductible by the Buyer. On the other hand, a sale of assets (or stock) almost always results in capital gains which may be taxed at lower capital gains rates. With the new 1997 Tax Acts, the importance of capital gains will (or should) become increasingly important, so, as the Seller, you will have a bigger tax bite on $100,000 of salary as opposed to $ 100,000 of capital gain.

Buyer and Seller Reports Must Be Consistent

Also, watch for consistency. Both the Buyer and Seller have to file reports with the IRS. If the prices allocated to specific assets by the Buyer or Seller are inconsistent, then an IRS tax audit could ensue. For example, a Buyer may allocate more to depreciable assets (to increase depreciation) than the Seller allocated.

Next time, we will consider ways to protect both Buyer and Seller from various risks of non-performance by the use of cash escrows, set-offs, warranties, and representations. Exciting stuff? Yes, if it is your money at stake.

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