The Different Types of Merger and Acquisition Agreements
When it is time to buy a business and sit down to make the deal, there are essentially two different types of merger and acquisition methods. The first is an asset purchase and the other is a stock purchase. But there is a third type emerging, a hybrid of sorts, where the purchase is a stock purchase, but it is structured like an asset purchase for tax purposes.
The difference is actually in what is being bought and sold. This involves an in depth understanding of buy/sell agreements. In the case of an asset purchase, certain assets of the business are being sold, but the business entity itself remains intact.
Which one of these is right for you? Quite simply, it depends. Here are some of the details.
These types of purchases are generally favored by buyers. The reason is that they can pick and choose the assets they wish to purchase, including equipment, client lists, and accounts receivable. The buyer does not have to purchase things like aging equipment, an unfavorable contract, or pending litigation.
There are also certain tax advantages to a buyer in an asset purchase, one of the primary reasons they prefer this method.
Stock purchases are usually preferred by the seller due to tax advantages, primarily on the capital gains side of things. It also allows the seller to “walk away” from the business without having to deal with certain residual future obligations to the business operations. The buyer essentially steps into the shoes of the seller, and this means they assume those future responsibilities.
A buyer might prefer a stock purchase in some cases though. It is often easier for the buyer to retain clients and contracts if the sale is structured as a stock purchase. In this case, it is important to make sure the terms of the contracts and the sale allow for this transition in the purchase.
The Hybrid Purchase
There are several reasons to arrange your business purchases in this hybrid method, where the stock purchase is treated as an asset purchase and there are several ways to do so. There are essentially three ways to “elect” or choose this method regulated by the IRS. Each has requirements about the type of company that can make the purchase and different tax rules behind each type.
They are labeled as the 338(h)(10), primarily concerned with an S-corporation stock; 338(g), an election that can only be chosen by the buyer due to some double-taxation requirements, and a 336(e), which blends some elements of the other two methods, but has its own restrictions.
Confused? It is understandable. The laws governing these sales can be challenging to navigate, and the key is that the buyer and seller must understand the tax consequences of each election. For instance, in the case of the 338(g) generally the seller requires the buyer to increase the purchase price to cover taxation costs.
Selling a business may seem like a complicated process, and it is. There are a number of layered nuances beyond the type of Merger and Acquisition methods you choose to use. The best thing you can do if you have a business for sale in Sacramento is top contact Rogerson Business Services, who will help you not only find the right buyer at the right time, but structure the sale itself in the most beneficial way.