If your at a point where you would like to sell your business, you should become familiar with the ways in which you can sell your business. There are 2 primary ways to sell your business. One way is by selling the business assets (tangible and intangible) and the other way is by selling the company’s stock (if a corporation) or membership units (if a limited liability company). Asset sales are the most common method of selling businesses. Each method of selling your business has it’s own benefits and drawbacks. It is best to discuss each method of selling your business with your attorney and your certified public accountant.
Stock Sales/Membership Interest Sales.
Stock sales are associated with Florida corporations and Membership Interest sales are associated with Florida limited liability companies. For the purposes of this article, we will refer to both as “stock sales.” During an stock sale, one or more owners will enter into an agreement with a buyer to sell their company’s stock for a certain price and on certain terms which are clearly delineated in a Stock Sale Agreement. Once the agreement is executed and the stock is transferred, the new buyer now has an ownership interest in the corporation (which encompasses all of the corporate assets). In sum, the ownership of the business changes however, the business entity, structure, assets and liabilities remain the same.
Assets sales are more involved than stock sale in that you have one corporate entity conveying both tangible and intangible assets to another corporate entity. Hence, there is an abundance of conveyance and closing documents associated with this process. The buyer corporate entity will remit money to the seller corporate entity pursuant to an Asset Sale/Purchase Agreement in exchange for the assets of the Seller enumerated in the Asset Sale/Purchase Agreement. Once the sale is over, the Seller can wind down and dissolve the corporate per the applicable Florida Statutes.
There are specific rights and obligations that are related to an asset sale. The buyer corporation retains the furniture, fixtures, and equipment of the seller. Other important unique aspects of the business such as the tradename and intangible property go to the buyer. This also includes the obligations the seller incurred through contracts with other businesses and lease agreements for rent payments, which may become large expenses depending on the condition and operating costs of the business.
Business liabilities should always be disclosed to the buyer. As a general rule of thumb, in a stock sale, the liabilities remain with the corporate entity whereas in an asset sale the liabilities remain with the seller corporate entity (with a few exceptions). Non-payment of Florida sales tax, unpaid encumbrances on business assets, and tax liens are a few examples of liabilities that attach to the business assets. For a buyer, it is very important to obtain a UCC, Judgment, and sales tax clearance search as part of the buyer’s due diligence.
What taxation issues will become significant after the sale?
Stock sales and asset sales are very different and they can have drastic taxation differences to both the seller and buyer. Typically, sellers prefer stock sales and buyer’s prefer asset sales. Typically, Stock Sales provide a greater tax saving to the seller in that the Seller only pays a capital gains tax on their profits and the profits are not taxed as ordinary income. Before you put your business for sale, it is imperative that you speak with your certified public accountant and seek advice as to which structure would result in the least tax burden to you post sale. Be proactive, not reactive.
Negotiating the terms of sale.
It is important to have an attorney before you begin negotiating the terms of the sale of your business. Knowledge is power. Once you sign your sale agreement, you are bound by its terms. Often business owners agree on certain terms that are to their detriment. An attorney can explain the legal ramifications of certain terms that are being negotiated and the effects to you, the seller, before you agree to such terms and sign a sale agreement.
Negotiations can be a complex process depending on the size of the business being transferred, along with its liabilities and other issues that need to be sorted out before the transaction is finalized. Be prepared. Be strategic. Be informed. Hire an attorney to protect you and guide you through the sale process.
Talk to a lawyer about the next steps for your business
To learn more about completing other important business transactions with the help of an attorney in the Orlando area, contact Legal Counsel, P.A. You will receive specific guidance related to your business and any relevant legal issues. Have questions? We have answers. Contact Legal Counsel, P.A. today at 407-982-4321.