What Does It Mean When a Business Sells Its Assets

This document is provided for informational purposes only and may be out of date and/or no longer applicable. Nothing in this publication constitutes legal, tax or investment advice. There is no guarantee that the claims made will materialize. The information contained in this document comes from sources believed to be reliable, but Mariner Capital Advisors does not guarantee the accuracy of such information. Contact a financial, tax or legal expert for specific information about your own situation. However, selling assets can also cause problems for buyers. Some assets are more difficult to transfer due to issues of accountability, legal ownership and third-party consent. Examples of assets that are more difficult to transfer include certain intellectual property rights, contracts, leases and permits. Obtaining consents and resubmitting permit applications can slow down the transaction process. Selling assets is less attractive to sellers for one simple reason: higher taxes. In the case of a sale of assets, sellers are potentially subject to higher taxes than in the case of a sale of shares.

While intangible assets such as goodwill are taxed at capital gains rates, other “hard” assets may be taxed at higher ordinary tax rates. Currently, federal capital gains rates are about 20 per cent, while government interest rates vary. For example, Florida`s capital gains rate is currently 0% and California`s is 13.3%. Normal income tax rates depend on the seller`s tax bracket. In addition, if the selling company is a C company, the seller is taxed twice: the selling company is taxed first when the assets are sold to the buyer and again when the proceeds are transferred outside the company. If the company is an S company that meets the following requirements, the sale of assets could trigger an integrated gains tax (BIG) at the company level: the company was previously a C company. The sale takes place within the first five years of switching to an S-Corporation On the positive side, given their higher tax costs, sellers may have more influence in negotiating a higher purchase price. One of the disadvantages of selling assets for everyone involved in the transaction is that some assets can be difficult to transfer, e.B.

Contracts without attribution clauses or landlord consent. In this article, we will focus on understanding how to sell your business assets and why this is important to you as a business owner. In the final purchase agreement, the company`s assets are divided into several areas by dividing the purchase price, including: This item is not intended to provide legal and/or tax advice. Every business transaction is unique, and buyers and sellers should always consult with the appropriate professionals (lawyers and accountants) when considering a business sale structure. Entrepreneurs often ask us about the advantages of selling assets over selling shares when you sell your company`s shares. The buyer and his lawyer will prepare the first transaction documents, but you and the buyer must first agree on the type of sale to be executed – asset or stock. The document that defines the structure of an asset sale is called an asset purchase agreement. In the case of a sale of assets, the seller retains ownership of the legal entity and the buyer acquires individual assets of the company, such as equipment, devices, leases, licenses, goodwill, trade secrets, trade names, telephone numbers and inventory. The sale of assets usually does not involve cash and the seller usually keeps the long-term debt bonds.

This is commonly referred to as a cashless and debt-free transaction. Normalized net working capital is usually also included in a sale. Net working capital often includes receivables, inventories, accrued liabilities and deferred income, supplier liabilities and deferred income. A number of changes must be managed before, during and after the completion of an asset sale. When the sale is complete, it must be confirmed that the company buying the asset can continue to do business, which can mean things like obtaining the right permits and licenses. If one of the employees is laid off at the time of sale, the company acquiring it must go through the reinstatement process. Contracts with suppliers and customers acquired by the new company must be legally transferred to the new company. Even if a business is sold in one piece, the Internal Revenue Service requires that the sale of each asset be treated separately for tax purposes. Some assets are classified as capital assets that can cause capital gains and losses, while other assets are classified as depreciable assets. Real estate is classified separately, such as land and buildings.

An asset sale occurs when a bank or other type of company sells its receivables to another party. A type of non-recourse sale that occurs for a variety of reasons, including asset risk mitigation, free cash flow generation, or liquidation requirements. The sale of assets can and often affects a company`s bottom line. If your company is not registered,. B for example a sole proprietorship or partnership, the sale of assets is the only put option, because ownership shares cannot be transferred during a sale. To determine a selling price for the company, the different assets of the company are valued individually. If the company in question is a sole proprietorship, partnership or limited liability company (LLC), the transaction cannot be structured as a sale of shares because none of these corporate structures have shares. Instead, owners of these types of entities can sell their partnership or membership shares, as opposed to the company that sells its assets.

If the company is incorporated as an ordinary C company or a sub-S company, buyers and sellers must decide whether the business should be structured as a sale of assets or a sale of shares. Buyers can`t just assume that customers will stay with them after the acquisition. Buyers should contact key customers and confirm if they are willing to stay. If the buyer does not do this, there is a risk that the customer will want to renegotiate or even terminate the contract after the sale. After completing the sale of the assets, the buyer must also ensure that the income is properly invoiced so that payments are not accidentally sent to the company that sold the asset. The buyer can no longer fall back on the assets after the sale. If the remedy were allowed, this property would result in the transaction being examined as financing – essentially a loan. This would not bring the company the desired result of an increase in free cash flow. Other factors beyond the scope of this article can also determine the structure you can use. An asset sale allows the seller to retain control of the business, but it is important to note that all debts and liabilities must be paid in full before any net cash proceeds can be claimed. For this type of sale, individual loans and entire loan pools are often used. A bank accounts receivable can be used to secure the sale of assets.

An asset sale can be used to reduce the risks associated with holding assets, it can help solve cash flow problems, and it can be used for liquidation purposes. If the company in question has a large number of copyrights or patents, or if it has significant government or business contracts that are difficult to award, a share sale may be a better option because the company, not the owner, retains ownership. .