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How To Investigate Any Business Opportunity
8. Structuring the Transaction
Tax and other consequences of the structure of a transaction have an important effect on the overall
value of the transaction to the principals. Each type of structure carries with it different tax conse-
quences for the buyer and seller. The type of corporation owned by the seller, the size and date of the
transaction, and the type of consideration paid may all have a bearing on the tax consequences. Since
tax law is constantly changing, it is important to seek legal and tax advice in determining the best way to
structure the purchase or sale.
Asset Versus Stock transactions
The purchase and sale of a business can be structured in either of two basic formats: (1) the purchase
of the stock of the seller's corporation, or (2) the purchase of the assets of the seller's business.
Asset transactions - In an asset transaction, the assets to be acquired are specified in the contract.
Practices vary from industry to industry but, in general, all the assets of the business except cash and
accounts receivable and none of the liabilities of the business convey to the buyer. The seller uses the
proceeds from the sale to liquidate all short term and long term liabilities. This means that the buyer pur-
chases all of the business's equipment, furniture, fixtures, inventory, trademarks, trade names, goodwill
and other intangible assets.
An asset transaction generally favors the buyer. The buyer acquires a new cost basis in the assets
which may allow a larger depreciation deduction to be taken. The seller must pay taxes on the difference
between his basis in the assets and the price paid by the buyer for the business.
The buyer may also prefer an asset transaction for liability reasons. By purchasing assets, the buyer
may avoid the possibility of becoming liable for any of the seller's corporation's undisclosed or unknown
liabilities. The most common liabilities of this type are income taxes, payroll withholding taxes and legal
actions.
Stock transactions - Stock transactions generally call for all of the assets and liabilities of the seller's
corporation and the stock of the corporation to be transferred to the buyer. In some cases, the buyer and
seller may choose to exclude certain assets or liabilities from being conveyed. The seller must pay taxes
on the difference between the seller's basis in the stock and the price paid by the buyer for the stock.
Sometimes stock deals are more expedient for both parties. Stock transactions provide for continuity in
relationships with suppliers. They also preclude the necessity of obtaining a lease assignment when the
lease is held only in the name of the corporation and when there is no provision in the lease calling for
an assignment in the event of a change in the controlling interest of the corporation. The risk of inheriting
undisclosed debts of the seller in a stock transaction can be minimized by providing for the right of offset
to future payments due the seller.
Installment Sales