What Is Selling to Another Corporation?
Once you've decided to sell your business, one of your most important jobs will be finding a buyer and getting the best possible deal. Finding an appropriate buyer may require you to evaluate different kinds of potential buyers and target those who would most likely have some interest in purchasing your business.
One option you might want to consider is selling your business to another corporation. Any corporation interested in buying your business--whether it be a large, publicly owned corporation or a small private firm--will have its own strategic reasons for wanting to do so. For example, the purchasing corporation might want to expand its market, eliminate competition, or acquire your business's assets and real estate location.
Selling to another corporation involves exchanging your business's assets or corporate stock for either cash or stock (or both) in the acquiring corporation. Tax consequences and other issues will depend largely on the form of payment you receive. A tax advisor and/or attorney can help you structure the sale so as to maximize your profit.
Selling for Cash
A cash sale occurs when you simply sell your business's stock or assets to the acquiring corporation for cash. While cash is certainly the safest and most liquid form of payment you can receive, a cash sale is not without problems. Insisting on an all-cash sale can narrow your pool of potential buyers and force you to lower your sale price. Moreover, receiving all cash may have serious tax consequences. All-cash sales are less frequent when compared to transactions that involve cash in combination with stock or other forms of payment.
Selling for Stock
Selling for stock means that you exchange your business's assets or corporate stock for stock in the acquiring corporation. While owning stock in the acquiring corporation exposes your money to the vagaries of the stock market, it also creates the potential for a greater return on your money. The acquisition of your company could even increase the value of the acquiring company's stock.
Questions to consider before accepting stock as payment include the following:
- Is the acquiring corporation's stock publicly traded?
- Will the stock you receive be voting stock, and will it be common or preferred stock?
- Will there be a waiting period before you can sell the stock?
The tax consequences of selling for stock will depend on whether you sell or hold onto the stock. Tax-free asset sales and tax-free stock sales are a possibility if you hold onto the stock.
Mergers and Acquisitions (M&A)
A merger is the process of joining the assets and liabilities of your company with those of another company. This can result in the formation of an entirely new corporation (sometimes called a consolidation) or the absorption of one company into the other (merger). An acquisition occurs when another company purchases your company and runs it as a subsidiary under a larger corporate umbrella.
Choosing one of these options may result in an all-cash buyout but will more likely involve some kind of stock swap. Although structuring M&As can be complicated and time-consuming, they offer certain tax benefits and may allow you to retain an ownership position if you don't want to completely sever all ties with your business.
When Can You Do It?
You can sell your business to another corporation as long as you own a viable, marketable business and are willing to sell it to a corporate entity rather than to an individual or private party. Because all-cash buyouts are not that common, you should also be willing to accept payment in the form of corporate stock or a combination of stock and cash.
Selling to a Corporation Can Be More Profitable
Corporations, particularly large ones, tend to have more disposable capital than private parties. They also tend to take a more strategic, long-term approach. They look beyond immediate profits and focus on potential future gains that can be realized through the acquisition of other companies. For these two reasons, a corporation will probably be willing to pay a higher price for a viable business than would a private party with limited capital and a more short-term approach.
Also, a private party would likely have to finance the purchase of your business, while most corporations would not. Thus, selling to a corporation might be better if you need money and want to receive payment in one lump-sum distribution.
Tip: If you actively seek bids from corporations interested in buying your business, you may end up with a price that exceeds the actual value of your business. With this in mind, it might be a good idea to withhold your asking price and see where the bidding goes.
You May Be Able to Retain Some Control
If you structure the sale of your business as an M&A transaction, you may be able to balance your desire to sell with your desire to retain some control. If you don't want to cash out entirely and pursue something else, an M&A transaction may give you expansion capital for your business while at the same time allowing you to retain an ownership position.
Selling to a Corporation Can Be Complicated and Expensive
Selling your business to another corporation can be complicated and time-consuming. Long, drawn-out negotiations over the price and terms of the sale may go nowhere until the desired sale finally falls through. The wasted time and energy, coupled with the expense of hiring advisors, may not be worth it in the end. In the case of a complex M&A transaction, the process of structuring and negotiating the sale to both companies' satisfaction can be a long and difficult process.
It Can Be Difficult to Find a Corporate Buyer
Corporations have strategic reasons for everything they do. They want to make cost-effective purchases. As a result, they tend to be picky when it comes to acquiring other companies. In general, most corporations only consider buying companies that have solid track records, strong market positions, and promising growth potential. Thus, you may have difficulty finding a corporation that wants to buy your business, especially if your business has been less than a star performer in its industry. Depending on your business's level of success, you may find that the only way you can sell to a corporation is by liquidating your business and selling the assets at a discounted price to another company in the same industry.
There Can Be Disadvantages to Receiving Stock as Payment
More often than not, selling to a corporation will require you to accept the corporation's stock as partial or full payment for your business. Receiving stock can prove to be a boon on the one hand if the value of the stock rises over the long term. Nevertheless, owning the stock exposes you to all the risks and anxieties that come with being a stock market investor. In addition, while stock in general is a relatively liquid asset, federal securities regulations may require you to hold onto the stock received from the acquiring corporation for a period of up to two years before you can sell it, depending on various circumstances.
Caution: Keep in mind that your corporate stock will be even less liquid if the corporation from which you receive it is not publicly traded.
How to Do It
Hire an attorney and/or tax advisor to assist you with planning the sale. Take the necessary steps to prepare your business for sale. Determine the value of your business, perhaps through a professional appraisal. Find a corporation interested in purchasing your business. Negotiate a sale price as well as form(s) of payment. Once you have reached an agreement, have your attorney(s) draw up the documentation outlining the terms.
Generally speaking, the sale of your business to another corporation will trigger a capital gain whether you receive cash or stock as payment. This means that you will pay taxes on the difference between your initial investment in your business and the price the acquiring corporation paid for it. The exact amount to be paid will depend on how you structure the sale and can be very high in some cases.
For example, if you sell your business's assets and realize a gain, you may pay more in taxes than if you sell stock because part of the gain may be taxable at a higher rate as ordinary income. Selling your business for all cash could cause your entire capital gain to be taxed for the year in which you receive the funds, thus putting you in an even higher tax bracket.
Caution: Depending on how the sale is structured, additional tax issues could arise. Consult a qualified tax advisor to help you sort out the tax implications.
Tip: Provided that you meet Internal Revenue Service (IRS) requirements, you may be able to structure the sale of your business as either a tax-free asset sale or a tax-free stock sale. A tax-free asset sale involves exchanging "substantially all" your business's assets for voting stock in the acquiring corporation. A tax-free stock sale involves exchanging the controlling interest of your corporate stock for voting stock in the acquiring corporation. Either way, you defer payment of your capital gain tax.
Tip: An M&A transaction may have tax advantages if you arrange for the other corporation to spread out your payments over a period of years, minimizing your tax exposure.
Caution: An M&A transaction will also have to comply with state law requirements.
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