Smith Holland M&A Resources
Asset sale deal structures are the most common, but there can be some disadvantages.
Luckily the top of the selling decision starts with the first question: stocks or assets? Most times the answer to this question is something that can block a sale in its tracks if the middle market mergers and acquisitions firm has not prepared the seller. The reward of a seller’s years of hard work deserves consideration and patient decision-making. Rarely does a top-of-mind solution exist to this conundrum and just like the levers to valuation, the levers to deciding on the type of sale are plentiful. Stocks or assets, how difficult can it be? This discussion will focus on assets, and one can imagine the inverse scenarios as being beneficial to a stock sale.
The asset sale may carry a negative connotation is some practices. This association largely stems from asset sales being preferred by unlicensed brokers, as well as scrupulous buyers looking for a fire sale or ways to put up smoke and mirrors during due diligence. Unfortunately, the connection is true. Asset sales are used by the less successful or involved M&A teams, but they do provide distinct advantages. However, the focus will remain on their pitfalls for now.
Taxation. Double-taxation to be exact. Asset sales carry a corporate tax level as well as shareholder tax level upon distribution of the sale proceeds. While that sounds unappealing enough, assets sales usually require more time from both the seller and buyer -- and time is just another form of money.
Legalities, regulations, and accounting complications add to the stack against an asset sale. The sale is literally the transaction of assets between two parties, meaning an eye on what is being dealt must be kept sharp. If the count of assets, such as inventory, are too complex, the deal might be in jeopardy. Don’t be caught in these examples.
When handing a transaction in the gas and oil industries, the literal pipeline of delivery might necessitate land rights or complex permits as it pertains to subterranean rights. Definitely, unwanted complexity in an asset sale, whereas a stock sale would keep the entity in place, to which the rights and contracts are already in place.
If properties are scattered across different jurisdictions, the intricacies of an asset sale are equally diverse, such as an increased tax burden on the company.
For wholesale distribution business, there might be boxes (digitally) of distribution agreements. Each new contract with suppliers carries a preparation cost, which may be prohibitive to the new owners if there isn’t preparation before the situation arises.
Moving on down the list, leases and contracts are forms of intangible assets that deserve their own section. For example, a lease may not be assignable to the new seller unless a third party provides consent. A third party with no interest in the transaction, thus no incentive for the deal to go through as the default is the current tenant remains on the lease. If the property is a coveted location, sprinkle on some more complexity. Say the third party does consent, bet on the price to be higher than the current tenant is paying. It puts the seller in an awkward position, as now the negotiating power lies with the third party, which may affect the valuation, timeframe, or both. The buyer does have some position, at least with the seller. The buyer should review all loan documents during due diligence, especially line items to protect the buyer in the form of triggered default provisions should the seller try to reassign the loan as part of a sale.
Like Santa down his list, local licensing is a name surely to receive no praise in an asset sale. A business may hold a license local to one jurisdiction in order to operate a vehicle in accordance with the law. The transfer of licenses undoubtedly requires administrative time, potential hearings, appeals and the reams of red tape associated with documentation modification. Also likely, the license may be stripped from the business upon the owner leaving. If the license was tied to the owner, and he or she leaves, the business may legally not be allowed to operate in the interim of licensed-owner changes. When a business is grand-fathered into a license that has now ballooned in requirements and fees, including training and upgrades, it may prove detrimental to consider an asset sale. Bulk sale laws come to bite in states with laws pertaining to buyers selling the previous owners inventory.
A gung-ho approach to selling your business is a great mindset for all parties. However, preparation and knowledge of deal structures will provide protection against the unexpected challenges of a transaction. Ultimately, if an excessive expense is created as a result of forcing an asset sale over a stock sale, a tough discussion will have to be fielded regarded who covers the bill. Don’t let a deal crumble at the eleventh hour because the proper diligence wasn’t taken to review every variable that makes the company tick. The simple remedy, as mentioned earlier, is to fork over money in exchange for the inconvenience, but that should be a last resort.
Risks are no stranger to asset sales, despite the attractive liability protection they provide for buyers. The importance of an experienced, proactively-communicating M&A team cannot be overstated.
Most of the times, frustrations in a deal can be traced back to simple misunderstandings. If both parties invest time to inform themselves about the types of company sales, the closing will seem like a foregone conclusion. Seek the advice of accounting, financial, or legal professionals for advice, as this article does not suffice as a one-stop source. You should consult with professionals in business decisions and never feel rushed or forced into a transaction. The sale of one’s business represents a milestone decision, as such, the appeal of a large cash inflow may be disguised over complex and unfavorable valuations. It is important to be confident as a seller in knowing the company is being represented fairly, and equally important for a buyer to trust the selling team as the subject matter experts of the business in question.
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