If you are contemplating selling your business, one of the most important considerations is whether to structure the sale as a stock or asset deal.  Most public company acquisitions are on a stock basis.  However, privately held companies are frequently either stock or assets sales.  Deal structure can be highly important as the advantages for one side can create disadvantages for the other side. 

Generally, a seller typically favors a stock deal and a buyer typically favors an asset deal.  All transactions are different, so facts and circumstances should be analyzed fully with tax and legal counsel.  Here are some advantages and disadvantages to a buyer and seller in a stock sale. 

Buyer Advantages:

·         Some stock transactions are not taxable, but all asset transactions are taxable. 

·         Less time consuming and costly than an asset transaction. 

Buyer Disadvantages:

·         No basis step-up to buyer (unless Section 338 is elected).

·         The buyer pays with after-tax dollars. 

·         If an individual, the financing is outside the company.

·         Tax attributes generally carry over, but there can be net operating loss implications.

·         Contracts continue in full force and effect - this can be positive or negative for the buyer. 

·         May acquire unwanted assets and liabilities. 

Seller Advantages:

·         Buyer acquires company subject to all liabilities.

·         Seller wants lower long-term capital gains. 

·         Some stock sales can qualify for ESOP or reorganization treatment. 

·         All assets are sold – no need to divest unwanted items. 

Seller Disadvantages:

·         Seller’s warranties and guarantees are broader. 

·         If seller financed, collateralization is more difficult.

·         Difficult for seller to hold back assets. 

·         If there are net operating losses, they can’t be used to offset other income. 

More than 100 business groups have come out in support of new legislation to make permanent the 20% qualified business income (“QBI”) deduction for pass-through entities (“PTEs”), according to a release from the S Corp Association. IRC Code Section 199a allows a 20% write-off of QBI for certain sole proprietors, owners of S corporations, and members of partnerships/LLCs. Introduced by Senator Steve Daines (Montana), the “Main Street Certainty Act of 2019”—S. 1149—is the companion bill to H.R. 216, bipartisan legislation introduced by Representatives Jason Smith (Missouri) and Henry Cuellar (Texas) in the House of Representatives.

The QBI deduction in the Tax Cuts and Jobs Act affects businesses’ cash flow, operations, and long-term strategy, which impact valuations of businesses that range from mom-and-pop stores to private equity investors. While the new tax law provided permanent tax relief to C corporations, which saw their tax rate slashed from 35% to 21% and an end to U.S. taxes on much of their foreign profits, PTE owners got only temporary relief under the law’s individual tax provisions, which are due to expire after 2025.