September 26, 2024 • 23 mins
In this episode, we dive into recent business closings, including a landscape equipment dealer and a local salon, discussing the complexities faced during these transactions.
Our main focus is on the key differences between asset sales and stock sales. We cover tax implications, risks, and benefits for both buyers and sellers, along with the importance of thorough due diligence and consulting tax professionals.
Whether you're buying or selling, this episode offers crucial insights into structuring deals, negotiating terms, and understanding the financial details of business sales. Visit kcapex.com for more resources, including blogs, valuation tools, and active listings. We’ve got you covered!
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Episode Transcript
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(00:00):
Music.
(00:08):
Let's say a buyer is willing to look at that, they're going to have to do a
lot more due diligence then because now they're going to be taking on some liabilities
they may not be aware of, right?
Music.
(00:30):
Welcome back to the Apex Business Advisors podcast.
I am your host, Andy Kavanaugh, Well, joined, as always, by the closer himself,
Doug Hubler, president of Apex.
Doug, do you have a cheat sheet for all the closings that you would like to
discuss? I have them memorized. That's because you're a professional. Right.
(00:52):
It's not too difficult. We've had several closings in the last week, or even this week.
And so I want to congratulate Chuck Campbell and Wayne Swisher on their closing of a,
it was a landscape equipment dealer and service they provided and found a good
(01:18):
strategic buyer for that business.
And that one, offer on that one happened pretty quickly.
Closing took a little while. Had to go to a couple of different banks, but got that deal done.
And what were you going to say? I know a little bit about that deal.
And part of the holdup was that there's a new SBA SOP that was written.
(01:41):
We've talked about it on the show. but a part of that SOP is that if you have
a like business in the same NAICS code,
you can qualify for a 0% down loan that is considered a bolt-on.
And the challenge that they had is that the buyer's accountant.
(02:06):
Just arbitrarily shoved him into a NAICS code that was not in the same NAICS
code. Oh, it wasn't compatible.
Okay. So basically these guys had identical businesses.
Right. They were both identical businesses, but the banks were choking on the
fact that on his tax returns,
that when you got to the six digit NAICS code, it was like they had the two
(02:30):
and the four and then the six digit, the accountant's like, I don't know, general.
Yeah. General equipment distributor. And that made a big difference.
And it made a huge difference. And so he had a little bit of delay there.
Well, and there was another issue with it too, was that he needed an investor
because he was working this other business,
but he did need an investor to help him qualify for a commercial loan, not through the SBA.
(02:57):
So if you go for a straight commercial loan, they always want a lot of collateral.
Collateral and so the investor had quite a
bit of money in that bank that they were able to collateralize so
so sometimes we have to jump through a few more hoops to get them done and so
we got done okay we'll talk we'll talk about some hoops that buyers and sellers
(03:17):
jump through in a minute and then another hoop jumper debbie small she closed
on another deal it was a local salon,
pretty well-known salon in the Johnson County area.
And that, you know, selling a salon can be difficult.
We always have issues with confidentiality and we don't, we have to be really
(03:42):
careful because there are gossipers in that industry, I've heard.
So have I. Yeah. Because we all hear about it. They talk.
So anyway, Debbie got that deal done just this past week.
The other challenge that we find in those as well is that it's similar to restaurants.
The people that would be your most likely buyers tend to be cashed slash tipped.
(04:05):
Yes. Employees, and they may or may not be, as we've talked many times on the
show about sellers reporting all of their earnings and income.
Because the other way too, if you're a tipped employee that don't want to involve
the IRS in your cash business,
as a buyer, when you present a personal financial statement and tax returns
(04:28):
for the last three years, it showed you made $13,000.
Right. obtaining a loan becomes kind of a challenge because you have nothing in the bank's eyes.
Well, you know, what's interesting about this deal was, it'll be interesting to see how it works out.
The buyer had experience in other businesses, has his own business.
(04:53):
Not related to cosmetology, but he thought this was a good business.
The seller's willing to stay for a period of time, but he'll be,
I think it's going to be an eye-opener when he starts to operate that business
and working with people within that industry,
it's going to be a challenge, I think. But he's up for it.
(05:15):
And good. Best of luck. Best of luck. I'm sure he'll be successful regardless.
We always want that to happen. So anyway, those are the two deals I want to talk about.
Done. We can move on now. So you talked about having to jump through hoops,
having to jump through challenges.
Sometimes just the specific structure of a deal is a hurdle that has to get
(05:39):
through and it has major implications on, call it cash out, cash in,
cash at close, and then cash down the road.
And the topic that we're wanting to discuss today is really,
this is something that's come up a little bit more frequently for me the past few weeks.
So I thought it might be good to share is what is the difference between an
(06:01):
asset sale and a stock sale?
And now this is where we put the disclaimer that what we're going to talk about is typical.
That every deal is unique, every point is negotiable. Something we're going
to talk about is how are assets and liabilities, how are accounts payables,
(06:22):
accounts receivables, and liabilities handled?
And the answer is it depends, right?
So when we're talking about things here, we're talking about things that are
typical in these types of arrangements.
And the other thing, the other disclaimer that we'll always put out there is
we're not accountants. I was going to say, I was hoping that was going to be
(06:45):
one of your disclaimers.
We're not CPAs or attorneys, but we know the general gist of this topic.
So, you know, again, what's the disclaimer that we see on all the weight loss
commercial? Your individual results will vary.
And don't take this if you're allergic to it. Yeah. Here's the side effects
of doing all of these things.
(07:06):
So, you know, kind of similar to when we talked to Mitzi last week about,
you know, financial planning and tax prep and tax planning and things like that.
These are also things that you should be having the conversation with your accountant
because a lot of times we'll see buyers and sellers will get into asset allocation,
(07:27):
not knowing that the numbers that they put on that contract matter down the
road. when they go to file their taxes.
So high level, let's talk about an asset sale versus a stock sale.
So let's start with what are we selling?
So if we're in an asset sale, what is it that is actually being transferred?
(07:49):
So an asset sale generally in our deals is going to be anything Anything tangible, equipment.
Inventory, the name of the business, the computer system, anything that's used
to run the business, operate the business.
And that is not going to include liability.
(08:13):
So a seller is going to take on, take care of any liabilities that are outstanding.
That's long-term debt, short-term debt. the buyer
gets the equipment inventory and
the name brand of the business the employees that kind of thing so tangible
and intangible mm-hmm if that business has any patents or trademarks or brands
(08:36):
or anything like that that are associated with operating the business right they get that I.
What are they not getting? They're not getting the cash.
Most often they do not get the accounts receivables. Right.
Most often they do not get the accounts payables. Right.
Again, those are some things that can be negotiated out, but in a typical transaction,
(08:58):
you do not get cash, liabilities.
Yeah. I think buyers just need
to go into a deal recognizing that's how they're going to be structured.
And like you say, there can be some negotiation on some of that.
Some of it depends on the size of the business too.
So in a stock sale, we're transferring the entire ownership of the business.
(09:21):
So, and this is where we will see this common is going to be in a larger type
of business, but there are certain industries where this is very, very common.
And so I happen to work in one of those industries where it's pretty common
and that's the healthcare care industry, and specifically in a home health situation,
the EIN needs to transfer as does, and more importantly, the license.
(09:46):
So liquor stores used to be in this situation to where they would be predominantly stock sales.
And part of that would be that I need the EIN to stay the same.
I need the state tax to stay the same because I'm going to acquire your liquor
license. And there's a finite amount of those in the state or the county.
(10:08):
So if I do an asset sale and I create a new entity and I create a new EIN and
I file for a new sales tax number, I go to the back of the line.
And so I do not have the opportunity to get, I have to re-credential,
I have to re-license, I have to do those things.
And so that could take 18 months. Yeah, especially if you're talking about something
(10:29):
that's a medical type license, Medicare, Medicaid, whatever,
then those can take quite a bit of time.
So a transfer of stock ownership is usually what we see there.
Yeah. And so in a stock sale, you tend to get everything.
(10:51):
So that could include cash, that could include the accounts receivables,
could include the accounts payable.
Yeah. The equity will transfer to the- Yeah. I mean, they're getting everything.
And so I think what is why we don't usually see stock sales,
they don't want everything.
They don't want to take on the liability of the business. this.
(11:14):
And there's a decent reason for that.
So the main thing is we talk about tax implications and an asset sale,
it's actually more favorable for a buyer and a stock sale, it's more favorable for the seller.
So the tax implication for an asset sale is the buyer gets to come in and basically
step up or reset the depreciation schedule and reset the amortization and the
(11:39):
the goodwill and things like that. Right.
They have their own schedule for that versus when you do a stock sale,
you inherit what is there.
Right. Right. So those are some of the things that you would see as far as advantageous.
So if I'm a buyer and I'm looking at, and we also see this a little bit more
(12:01):
on sellers that have C-corps.
That the advantage of selling the entire entity becomes more favorable and advantageous
for a C-Corp because of the depreciation, the double taxation. Right.
I think what can happen, and we've seen this before too, is say,
(12:23):
okay, the seller is really going to demand.
They get into it. They see what their tax picture is going to be.
Then they come back and say, okay, I want this to be a stock sale.
It had been an asset sale. All the documents have been set up around that.
Now he wants to switch to a stock sale.
Well, let's say a buyer is willing to look at that.
They're going to have to do a lot more due diligence then because now they're
(12:47):
going to be taking on some liabilities they may not be aware of, right?
The other thing is because they're not getting a step-up basis and the seller
would have a better stock tax position, the buyer is going to say, well, I can't now.
I'll pay you what I was going to pay you. I was going to pay you $5 million.
(13:07):
Now, because of the hit to me on the taxes, I'm going to be in the responsibility
of all these liabilities.
Now, maybe I can only offer you 75% of what I was going to pay. Yeah.
And so the liabilities actually become one of the biggest risks.
Now, again, let's keep in mind it might be business specific.
(13:30):
Right. You know, what's the likelihood of this risk?
You know, if I'm a fire extinguisher manufacturer, I've got a pretty darn big
risk here if I do it in a stock sale.
If I am a manufacturer of a door hinge that holds, you know.
A residential door. Yeah. Probably not too many risks there.
(13:53):
Yeah. It's not like that's going to be the cause for the fire that burns down
the entire neighborhood. Right.
Yeah. Then they're going to just
be focused more on the financial piece of it. What's it mean to me now?
Yeah. So when that liability, when you're assuming that liability,
I think the key thing too in a stock
sale is a buyer would be assuming liabilities, both known and unknown.
(14:15):
Right. And really it's that second part that's really the part where you're like unknown.
Okay. So I've acquired this company, I've acquired the shell.
Let's rewind the tape eight years before I was even remotely considering this business.
It wasn't even for sale and this event occurred.
The current buyer could be on the hook. Sure. I think about a remodeling business
(14:40):
that has a five-year guarantee on their work, right?
And that's something I wouldn't want to take on because I don't know what all
the jobs they did over the last five years. if I have to go back and redo the
tile work in their bathroom or something.
And I only know that from personal experience, right?
I had to have my contractor come back three times to fix tile.
(15:05):
Now, if a buyer's taking that on, they're taking on that risk.
Yeah, and I think that, again, goes back to the, hey, let's restructure what I'm paying you.
The benefit, too, there is when they restructure the payment like that,
But really what the seller, it's almost like it's a wash.
(15:26):
The seller is going to receive the same amount because their tax liability has now been lessened.
Right, right. The buyer takes on a higher tax liability.
So really the buyer is going to pay about the same that they would pay on an asset sale.
The seller is going to receive about the same they're going to would receive
on an asset sale. The main difference is, is that the government doesn't get their cut.
(15:49):
And they don't like that, but. You know, I think on, say on the positive side
of doing a stock sale, besides the licensing and speeding up that piece of it,
is the seamless transition.
Transition, and some businesses have, you know, if they've got 20 contracts
(16:09):
outstanding, they've got 20 customers buying their stuff,
then there's no real transition that has to be, you know, sent out saying,
oh, there's a transfer of ownership, here's a new name, here's a new bank account,
here's where you send your bill, your invoices to now.
There's none of that. It's just, and for employees, they wouldn't see any difference either.
(16:32):
Everything would be the same. Their paycheck would be the same.
Yeah. And that's one of the biggest benefits of a stock sale is there is,
that makes the transition incredibly easy.
Obviously in an asset sale, that's going to be much more difficult because now
I have to go out and I have to get, and keep in mind, I have no history with
(16:52):
these suppliers that I'm going to go out and ask for a line of credit on or pricing
terms or, you know, anything that I would need to operate the business.
So under the asset sale, my, my game could change and it could change because I'm Andy and not Doug.
And because I'm Andy and not Doug and they don't have history with me.
(17:14):
I started in as the, Hey, here's our, here's our standard pricing.
Yeah. You know, I mean, if you want to keep working with us,
you'll pay the standard pricing and depending on how easy it is to leave or
leverage that, that relationship.
Yeah. And we've talked about transitions before in the deal and how important
it is for the owner to help with those transitions.
(17:36):
That's a great example of, you know, have kind of a team owner and buyer going
out to their customers and vendors to say, hey, we're making a transition.
It doesn't have to be so bold as, hey, we're starting over.
This is the new guy. I'm out. It can be go in as a team, as a partnership and
make that transition smooth.
(17:58):
Well, one of the key benefits of the asset sale too is that from a liability
standpoint, you're not really taking on the unknown liabilities.
Right. You can choose to take on the known. It can be part of the negotiation.
And we'll see you know, certain accounts payable, accounts payable might be
included as part of the, as part of the deal.
(18:18):
So you might say something like, okay, well, I'm going to, you know,
we've got a real long collection time here.
So I'm going to get both receivables and payables.
Right. You know, as of this date, if your payable is 190,000,
your receivables 290, I get both.
And, you know, we're going to discount the receivable because there might be
some things that I've got to do to, to not get that. I'm just not going to collect all of that.
(18:44):
And then the other, the other thing too, is just kind of from a common use standpoint.
You know, really we're going to see vast majority of the, the businesses that
we use, it's going to be the asset sale, right?
You, you tend to see the stock sale and major real big businesses,
or like I said, specialized industries. Cool.
(19:05):
And I think when you're talking about stock sales on the larger ones,
we're usually dealing with strategics, private equity groups maybe.
But even in those cases, they're not really looking to do stock sales.
So I think we're probably 95% of our deals are asset sales.
And so from a buyer perspective, what that means is that when you're looking
(19:29):
at the P&L of the business, that's going to be your primary financial report
you're going to look at, P&L tax return.
The balance sheet is going to have a little impact, but not much, right?
So I have somebody looking at a very small business that is not in a specialty
industry where transferring the EIN and sales tax number has any benefit. fit.
(19:52):
And all of the questions were about the balance sheet. Tell me what's this goodwill
that they've got here? Well, you won't have that.
What's this, you know, shows this in the equity line. Well, you won't have that,
right? You're going to have your own schedule.
You're going to have your own depreciation schedule. You're going to have your
own long-term liabilities for a loan that you might take or pay back yourself.
(20:13):
So that's going to be something that you want to be mindful of when you're doing
evaluations as a buyer on some of these smaller businesses that- Well,
I'll say the other thing about the balance sheet on most small companies is
they don't keep them up well.
And they might make adjustments at the end of the year based on what their accountant's
(20:35):
telling them. Maybe they do inventory once a year.
They're not keeping up up with their, say, some of their payables,
where you would normally keep up with wages that are due,
accounts payable, those kinds of things that are not necessarily keeping them up monthly.
So I kind of look at the balance sheet and say, well, I mean,
(20:59):
maybe it's accurate. Maybe there's inventory there.
But if I see a $2 million inventory, I will ask the seller, what is your inventory
level and they'll go, you know, I'm not sure.
I'll need to check on that and come back at a million five. Yeah.
Well, we put that 2 million on there cause it was better for our taxes.
Right, or maybe not. Maybe they need to throw it in at 200,000.
(21:22):
Well, anything, any final thoughts on asset versus stock sale?
No, I think one of the things that you said early on was, you know, negotiable.
A lot of these things that are negotiable, sometimes, you know,
with the balance sheet, we talk about a buyer potentially working capital into the deal.
Again, that's all kind of deal by deal.
(21:45):
And we get creative to get these deals to work. So, again, people need to talk
to their tax professionals on these things when they're planning to sell.
Is that where your creative financing comes in?
Talking to a tax professional? Yes.
We will creatively finance this by taking a check. What was it you said?
(22:09):
It's a cashier's check. Cashier's check. Wire transfer. Wire transfer.
Or cash. Cash. Right. Those are the – that's – That's the creative payment for a deal.
Feel free to be as creative inside within those three. You can choose. Correct.
Well, one thing we hope you will choose to do is to go to the Apex website, kcapex.com.
(22:30):
That's every place you need to know about buying or selling a business.
I think we've got blogs on this topic in the archives.
And, of course, now we've got a podcast on it. We've got tons of podcasts in
the archives as well as blogs.
Active businesses for sale. how to get in contact with the broker,
valuation tools, it's all out there.
So if you're looking at buying or selling a business, we got you, fam.
(22:52):
Music.
Music.
(00:08):
Let's say a buyer is willing to look at that, they're going to have to do a
lot more due diligence then because now they're going to be taking on some liabilities
they may not be aware of, right?
Music.
(00:30):
Welcome back to the Apex Business Advisors podcast.
I am your host, Andy Kavanaugh, Well, joined, as always, by the closer himself,
Doug Hubler, president of Apex.
Doug, do you have a cheat sheet for all the closings that you would like to
discuss? I have them memorized. That's because you're a professional. Right.
(00:52):
It's not too difficult. We've had several closings in the last week, or even this week.
And so I want to congratulate Chuck Campbell and Wayne Swisher on their closing of a,
it was a landscape equipment dealer and service they provided and found a good
(01:18):
strategic buyer for that business.
And that one, offer on that one happened pretty quickly.
Closing took a little while. Had to go to a couple of different banks, but got that deal done.
And what were you going to say? I know a little bit about that deal.
And part of the holdup was that there's a new SBA SOP that was written.
(01:41):
We've talked about it on the show. but a part of that SOP is that if you have
a like business in the same NAICS code,
you can qualify for a 0% down loan that is considered a bolt-on.
And the challenge that they had is that the buyer's accountant.
(02:06):
Just arbitrarily shoved him into a NAICS code that was not in the same NAICS
code. Oh, it wasn't compatible.
Okay. So basically these guys had identical businesses.
Right. They were both identical businesses, but the banks were choking on the
fact that on his tax returns,
that when you got to the six digit NAICS code, it was like they had the two
(02:30):
and the four and then the six digit, the accountant's like, I don't know, general.
Yeah. General equipment distributor. And that made a big difference.
And it made a huge difference. And so he had a little bit of delay there.
Well, and there was another issue with it too, was that he needed an investor
because he was working this other business,
but he did need an investor to help him qualify for a commercial loan, not through the SBA.
(02:57):
So if you go for a straight commercial loan, they always want a lot of collateral.
Collateral and so the investor had quite a
bit of money in that bank that they were able to collateralize so
so sometimes we have to jump through a few more hoops to get them done and so
we got done okay we'll talk we'll talk about some hoops that buyers and sellers
(03:17):
jump through in a minute and then another hoop jumper debbie small she closed
on another deal it was a local salon,
pretty well-known salon in the Johnson County area.
And that, you know, selling a salon can be difficult.
We always have issues with confidentiality and we don't, we have to be really
(03:42):
careful because there are gossipers in that industry, I've heard.
So have I. Yeah. Because we all hear about it. They talk.
So anyway, Debbie got that deal done just this past week.
The other challenge that we find in those as well is that it's similar to restaurants.
The people that would be your most likely buyers tend to be cashed slash tipped.
(04:05):
Yes. Employees, and they may or may not be, as we've talked many times on the
show about sellers reporting all of their earnings and income.
Because the other way too, if you're a tipped employee that don't want to involve
the IRS in your cash business,
as a buyer, when you present a personal financial statement and tax returns
(04:28):
for the last three years, it showed you made $13,000.
Right. obtaining a loan becomes kind of a challenge because you have nothing in the bank's eyes.
Well, you know, what's interesting about this deal was, it'll be interesting to see how it works out.
The buyer had experience in other businesses, has his own business.
(04:53):
Not related to cosmetology, but he thought this was a good business.
The seller's willing to stay for a period of time, but he'll be,
I think it's going to be an eye-opener when he starts to operate that business
and working with people within that industry,
it's going to be a challenge, I think. But he's up for it.
(05:15):
And good. Best of luck. Best of luck. I'm sure he'll be successful regardless.
We always want that to happen. So anyway, those are the two deals I want to talk about.
Done. We can move on now. So you talked about having to jump through hoops,
having to jump through challenges.
Sometimes just the specific structure of a deal is a hurdle that has to get
(05:39):
through and it has major implications on, call it cash out, cash in,
cash at close, and then cash down the road.
And the topic that we're wanting to discuss today is really,
this is something that's come up a little bit more frequently for me the past few weeks.
So I thought it might be good to share is what is the difference between an
(06:01):
asset sale and a stock sale?
And now this is where we put the disclaimer that what we're going to talk about is typical.
That every deal is unique, every point is negotiable. Something we're going
to talk about is how are assets and liabilities, how are accounts payables,
(06:22):
accounts receivables, and liabilities handled?
And the answer is it depends, right?
So when we're talking about things here, we're talking about things that are
typical in these types of arrangements.
And the other thing, the other disclaimer that we'll always put out there is
we're not accountants. I was going to say, I was hoping that was going to be
(06:45):
one of your disclaimers.
We're not CPAs or attorneys, but we know the general gist of this topic.
So, you know, again, what's the disclaimer that we see on all the weight loss
commercial? Your individual results will vary.
And don't take this if you're allergic to it. Yeah. Here's the side effects
of doing all of these things.
(07:06):
So, you know, kind of similar to when we talked to Mitzi last week about,
you know, financial planning and tax prep and tax planning and things like that.
These are also things that you should be having the conversation with your accountant
because a lot of times we'll see buyers and sellers will get into asset allocation,
(07:27):
not knowing that the numbers that they put on that contract matter down the
road. when they go to file their taxes.
So high level, let's talk about an asset sale versus a stock sale.
So let's start with what are we selling?
So if we're in an asset sale, what is it that is actually being transferred?
(07:49):
So an asset sale generally in our deals is going to be anything Anything tangible, equipment.
Inventory, the name of the business, the computer system, anything that's used
to run the business, operate the business.
And that is not going to include liability.
(08:13):
So a seller is going to take on, take care of any liabilities that are outstanding.
That's long-term debt, short-term debt. the buyer
gets the equipment inventory and
the name brand of the business the employees that kind of thing so tangible
and intangible mm-hmm if that business has any patents or trademarks or brands
(08:36):
or anything like that that are associated with operating the business right they get that I.
What are they not getting? They're not getting the cash.
Most often they do not get the accounts receivables. Right.
Most often they do not get the accounts payables. Right.
Again, those are some things that can be negotiated out, but in a typical transaction,
(08:58):
you do not get cash, liabilities.
Yeah. I think buyers just need
to go into a deal recognizing that's how they're going to be structured.
And like you say, there can be some negotiation on some of that.
Some of it depends on the size of the business too.
So in a stock sale, we're transferring the entire ownership of the business.
(09:21):
So, and this is where we will see this common is going to be in a larger type
of business, but there are certain industries where this is very, very common.
And so I happen to work in one of those industries where it's pretty common
and that's the healthcare care industry, and specifically in a home health situation,
the EIN needs to transfer as does, and more importantly, the license.
(09:46):
So liquor stores used to be in this situation to where they would be predominantly stock sales.
And part of that would be that I need the EIN to stay the same.
I need the state tax to stay the same because I'm going to acquire your liquor
license. And there's a finite amount of those in the state or the county.
(10:08):
So if I do an asset sale and I create a new entity and I create a new EIN and
I file for a new sales tax number, I go to the back of the line.
And so I do not have the opportunity to get, I have to re-credential,
I have to re-license, I have to do those things.
And so that could take 18 months. Yeah, especially if you're talking about something
(10:29):
that's a medical type license, Medicare, Medicaid, whatever,
then those can take quite a bit of time.
So a transfer of stock ownership is usually what we see there.
Yeah. And so in a stock sale, you tend to get everything.
(10:51):
So that could include cash, that could include the accounts receivables,
could include the accounts payable.
Yeah. The equity will transfer to the- Yeah. I mean, they're getting everything.
And so I think what is why we don't usually see stock sales,
they don't want everything.
They don't want to take on the liability of the business. this.
(11:14):
And there's a decent reason for that.
So the main thing is we talk about tax implications and an asset sale,
it's actually more favorable for a buyer and a stock sale, it's more favorable for the seller.
So the tax implication for an asset sale is the buyer gets to come in and basically
step up or reset the depreciation schedule and reset the amortization and the
(11:39):
the goodwill and things like that. Right.
They have their own schedule for that versus when you do a stock sale,
you inherit what is there.
Right. Right. So those are some of the things that you would see as far as advantageous.
So if I'm a buyer and I'm looking at, and we also see this a little bit more
(12:01):
on sellers that have C-corps.
That the advantage of selling the entire entity becomes more favorable and advantageous
for a C-Corp because of the depreciation, the double taxation. Right.
I think what can happen, and we've seen this before too, is say,
(12:23):
okay, the seller is really going to demand.
They get into it. They see what their tax picture is going to be.
Then they come back and say, okay, I want this to be a stock sale.
It had been an asset sale. All the documents have been set up around that.
Now he wants to switch to a stock sale.
Well, let's say a buyer is willing to look at that.
They're going to have to do a lot more due diligence then because now they're
(12:47):
going to be taking on some liabilities they may not be aware of, right?
The other thing is because they're not getting a step-up basis and the seller
would have a better stock tax position, the buyer is going to say, well, I can't now.
I'll pay you what I was going to pay you. I was going to pay you $5 million.
(13:07):
Now, because of the hit to me on the taxes, I'm going to be in the responsibility
of all these liabilities.
Now, maybe I can only offer you 75% of what I was going to pay. Yeah.
And so the liabilities actually become one of the biggest risks.
Now, again, let's keep in mind it might be business specific.
(13:30):
Right. You know, what's the likelihood of this risk?
You know, if I'm a fire extinguisher manufacturer, I've got a pretty darn big
risk here if I do it in a stock sale.
If I am a manufacturer of a door hinge that holds, you know.
A residential door. Yeah. Probably not too many risks there.
(13:53):
Yeah. It's not like that's going to be the cause for the fire that burns down
the entire neighborhood. Right.
Yeah. Then they're going to just
be focused more on the financial piece of it. What's it mean to me now?
Yeah. So when that liability, when you're assuming that liability,
I think the key thing too in a stock
sale is a buyer would be assuming liabilities, both known and unknown.
(14:15):
Right. And really it's that second part that's really the part where you're like unknown.
Okay. So I've acquired this company, I've acquired the shell.
Let's rewind the tape eight years before I was even remotely considering this business.
It wasn't even for sale and this event occurred.
The current buyer could be on the hook. Sure. I think about a remodeling business
(14:40):
that has a five-year guarantee on their work, right?
And that's something I wouldn't want to take on because I don't know what all
the jobs they did over the last five years. if I have to go back and redo the
tile work in their bathroom or something.
And I only know that from personal experience, right?
I had to have my contractor come back three times to fix tile.
(15:05):
Now, if a buyer's taking that on, they're taking on that risk.
Yeah, and I think that, again, goes back to the, hey, let's restructure what I'm paying you.
The benefit, too, there is when they restructure the payment like that,
But really what the seller, it's almost like it's a wash.
(15:26):
The seller is going to receive the same amount because their tax liability has now been lessened.
Right, right. The buyer takes on a higher tax liability.
So really the buyer is going to pay about the same that they would pay on an asset sale.
The seller is going to receive about the same they're going to would receive
on an asset sale. The main difference is, is that the government doesn't get their cut.
(15:49):
And they don't like that, but. You know, I think on, say on the positive side
of doing a stock sale, besides the licensing and speeding up that piece of it,
is the seamless transition.
Transition, and some businesses have, you know, if they've got 20 contracts
(16:09):
outstanding, they've got 20 customers buying their stuff,
then there's no real transition that has to be, you know, sent out saying,
oh, there's a transfer of ownership, here's a new name, here's a new bank account,
here's where you send your bill, your invoices to now.
There's none of that. It's just, and for employees, they wouldn't see any difference either.
(16:32):
Everything would be the same. Their paycheck would be the same.
Yeah. And that's one of the biggest benefits of a stock sale is there is,
that makes the transition incredibly easy.
Obviously in an asset sale, that's going to be much more difficult because now
I have to go out and I have to get, and keep in mind, I have no history with
(16:52):
these suppliers that I'm going to go out and ask for a line of credit on or pricing
terms or, you know, anything that I would need to operate the business.
So under the asset sale, my, my game could change and it could change because I'm Andy and not Doug.
And because I'm Andy and not Doug and they don't have history with me.
(17:14):
I started in as the, Hey, here's our, here's our standard pricing.
Yeah. You know, I mean, if you want to keep working with us,
you'll pay the standard pricing and depending on how easy it is to leave or
leverage that, that relationship.
Yeah. And we've talked about transitions before in the deal and how important
it is for the owner to help with those transitions.
(17:36):
That's a great example of, you know, have kind of a team owner and buyer going
out to their customers and vendors to say, hey, we're making a transition.
It doesn't have to be so bold as, hey, we're starting over.
This is the new guy. I'm out. It can be go in as a team, as a partnership and
make that transition smooth.
(17:58):
Well, one of the key benefits of the asset sale too is that from a liability
standpoint, you're not really taking on the unknown liabilities.
Right. You can choose to take on the known. It can be part of the negotiation.
And we'll see you know, certain accounts payable, accounts payable might be
included as part of the, as part of the deal.
(18:18):
So you might say something like, okay, well, I'm going to, you know,
we've got a real long collection time here.
So I'm going to get both receivables and payables.
Right. You know, as of this date, if your payable is 190,000,
your receivables 290, I get both.
And, you know, we're going to discount the receivable because there might be
some things that I've got to do to, to not get that. I'm just not going to collect all of that.
(18:44):
And then the other, the other thing too, is just kind of from a common use standpoint.
You know, really we're going to see vast majority of the, the businesses that
we use, it's going to be the asset sale, right?
You, you tend to see the stock sale and major real big businesses,
or like I said, specialized industries. Cool.
(19:05):
And I think when you're talking about stock sales on the larger ones,
we're usually dealing with strategics, private equity groups maybe.
But even in those cases, they're not really looking to do stock sales.
So I think we're probably 95% of our deals are asset sales.
And so from a buyer perspective, what that means is that when you're looking
(19:29):
at the P&L of the business, that's going to be your primary financial report
you're going to look at, P&L tax return.
The balance sheet is going to have a little impact, but not much, right?
So I have somebody looking at a very small business that is not in a specialty
industry where transferring the EIN and sales tax number has any benefit. fit.
(19:52):
And all of the questions were about the balance sheet. Tell me what's this goodwill
that they've got here? Well, you won't have that.
What's this, you know, shows this in the equity line. Well, you won't have that,
right? You're going to have your own schedule.
You're going to have your own depreciation schedule. You're going to have your
own long-term liabilities for a loan that you might take or pay back yourself.
(20:13):
So that's going to be something that you want to be mindful of when you're doing
evaluations as a buyer on some of these smaller businesses that- Well,
I'll say the other thing about the balance sheet on most small companies is
they don't keep them up well.
And they might make adjustments at the end of the year based on what their accountant's
(20:35):
telling them. Maybe they do inventory once a year.
They're not keeping up up with their, say, some of their payables,
where you would normally keep up with wages that are due,
accounts payable, those kinds of things that are not necessarily keeping them up monthly.
So I kind of look at the balance sheet and say, well, I mean,
(20:59):
maybe it's accurate. Maybe there's inventory there.
But if I see a $2 million inventory, I will ask the seller, what is your inventory
level and they'll go, you know, I'm not sure.
I'll need to check on that and come back at a million five. Yeah.
Well, we put that 2 million on there cause it was better for our taxes.
Right, or maybe not. Maybe they need to throw it in at 200,000.
(21:22):
Well, anything, any final thoughts on asset versus stock sale?
No, I think one of the things that you said early on was, you know, negotiable.
A lot of these things that are negotiable, sometimes, you know,
with the balance sheet, we talk about a buyer potentially working capital into the deal.
Again, that's all kind of deal by deal.
(21:45):
And we get creative to get these deals to work. So, again, people need to talk
to their tax professionals on these things when they're planning to sell.
Is that where your creative financing comes in?
Talking to a tax professional? Yes.
We will creatively finance this by taking a check. What was it you said?
(22:09):
It's a cashier's check. Cashier's check. Wire transfer. Wire transfer.
Or cash. Cash. Right. Those are the – that's – That's the creative payment for a deal.
Feel free to be as creative inside within those three. You can choose. Correct.
Well, one thing we hope you will choose to do is to go to the Apex website, kcapex.com.
(22:30):
That's every place you need to know about buying or selling a business.
I think we've got blogs on this topic in the archives.
And, of course, now we've got a podcast on it. We've got tons of podcasts in
the archives as well as blogs.
Active businesses for sale. how to get in contact with the broker,
valuation tools, it's all out there.
So if you're looking at buying or selling a business, we got you, fam.
(22:52):
Music.
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