Deal structure basics for the advisor in the room

Asset sale versus stock sale

The great majority of transactions in the $1 to $10 million range are asset sales. Buyers prefer them: they get a stepped-up basis in the acquired assets, future depreciation and amortization deductions, and they leave behind unknown liabilities. Sellers generally prefer a stock or equity sale, which is simpler and more likely to produce uniform capital gain treatment.

The gap between the two positions is real money, and it is negotiable. A buyer's tax benefit from a step-up has a present value; where the seller's cost of an asset structure is quantified early, that difference can be priced into the deal instead of absorbed by the seller in silence.

Purchase price allocation

In an asset deal the price is allocated across classes — cash, receivables, inventory, tangible property, intangibles and goodwill. The allocation determines the seller's character of gain, including ordinary income recapture on depreciated equipment, and determines the buyer's recovery period. The parties must report consistently, which is precisely why the allocation should be negotiated as part of the price rather than handed to the accountants after signing.

Personal goodwill

Where a business's value rests substantially on the owner's own relationships, reputation or expertise, some portion of the consideration may be attributable to personal goodwill owned by the individual rather than the entity. In the right facts, particularly with a C corporation, this can materially change the outcome. It is fact-intensive, it requires supporting documentation and consistent treatment, and it is not available simply because the parties would like it to be.

Seller notes, installment treatment and earn-outs

Most SBA-financed transactions include a seller note, and many include a period during which it is on full standby. Deferred payments raise questions of installment reporting, imputed interest, and what happens if the business underperforms. Earn-outs add a further layer: how earnings will be measured, who controls the levers that determine them, and what recourse exists if the buyer runs the business in a way that suppresses the target.

F-reorganization

For S corporations, a pre-closing F-reorganization is a common structure that allows the buyer to acquire equity interests while achieving asset-sale treatment for tax purposes, preserving the S election and simplifying the transfer of contracts, licenses and permits. It has to be planned in advance of closing, which means the tax advisor has to be involved during the LOI period rather than at the closing table.

Escrow, holdbacks and working capital

Expect a portion of the price to be held back against the seller's representations for a defined period, and expect a working capital target that determines whether cash moves at closing in one direction or the other. Both are ordinary. Both cost money when they are not modeled before the LOI is signed.

Transition and non-compete

Nearly every deal includes a transition period and a non-competition covenant. Consideration specifically allocated to either is treated differently from the sale of goodwill, and a covenant drafted too broadly invites an argument about enforceability under Texas law.

Alamo Brokers of Texas is a licensed Texas real estate brokerage. We do not provide tax or legal advice. The material above is general and educational, and every transaction should be reviewed by the client's own counsel and tax advisor.