You’ve put in many years in your funeral home helping families through their most difficult times. Now it’s time for you to sell your business and retire. The common question is should you sell only your business assets or your ownership interest of the business entity itself (in most cases, the sale of your "stock")? As a general rule, sellers prefer stock sales, while buyers prefer asset sales. Examining the differences between the two methods will help explain why this is true.
In an asset sale, the buyer typically purchases the majority of the assets of the business, such as equipment, accounts receivable, inventory and other items.
Buyers typically prefer asset sales because it allows for certain tax benefits. An asset sale also allows the buyer to better select and choose those assets it wishes to purchase while excluding those liabilities which it does not wish to assume.
A stock sale is a method where the stock, or other ownership interest of a business, is sold to a new owner. There are two key advantages to a stock sale from the seller's perspective. First, the buyer "steps into the shoes" of the seller, thereby freeing the seller from the obligations associated with the past and future operations of the business. The second advantage is the tax implications. In general, a stock sale is advantageous for a seller because the income earned from the sale is taxed at capital gains rates, which are typically lower than ordinary income tax rates.
You need to remember that in any sale, there will be some compromise. The buyer and seller cannot both structure the sale entirely to their advantage. Understanding the basic differences between asset sales and stock sales assists buyers and sellers as they negotiate the terms of a sale that are most beneficial to them. It also helps them avoid the pitfall of agreeing to an asset or stock sale early in the negotiations without understanding the long-term ramifications.
Since every business sale involves a unique set of circumstances, it is important to check with your financial advisors when you are ready to sell your funeral home to determine whether an asset sale, stock sale or other method is more desirable based on the above considerations and other factors.
Be sure to speak with your CPA and other advisors to determine the best option for you and your business.