When an owner tells me they are selling their company, I usually ask a question that sounds like a technicality: are you selling the company, or what the company owns? Most owners have not thought about it, and most assume the answer is the company. For a business in the size range most of us own, it usually is not. The difference decides what you keep, what you are still responsible for after closing, and how much of the price you take home after taxes.
1. Most small business sales are asset sales
In an asset sale, the buyer purchases what the business uses to make money: the equipment, the inventory, the name, the phone number and website, the customer relationships and the goodwill. The legal entity itself, your LLC or corporation, stays with you. Buyers of businesses this size, here in the Triangle and everywhere else, generally prefer it that way, and so do their lenders, for two reasons. They do not inherit the company's history, and the tax treatment usually works in their favor.
2. What you keep, and what stays with you
Because you keep the entity, you usually keep its cash, and often the receivables, though that is negotiable. Business debt is typically paid off at closing out of the proceeds so the assets transfer free of liens. The harder part to absorb is that the entity's past stays with you too: an old tax question, a warranty claim on work done before closing, a dispute that has not surfaced yet. That is exactly what the buyer is paying to avoid. Anyone who has run a business for decades knows there is always something in the past, and in an asset sale it remains yours.
3. What has to be moved over
Since the entity is not changing hands, everything the buyer needs has to be transferred individually. The lease is assigned to the buyer, which usually takes the landlord's consent. Contracts with customers and suppliers are assigned, some with consent. Licenses and permits are often reissued in the buyer's name rather than transferred. Vehicle titles change. Employees technically leave your company and are hired by the buyer, which means a final payroll from you and a decision about accrued vacation. None of this is hard, but all of it takes time, and the lease alone has held up more than one closing.
4. The tax side, in plain terms
In an asset sale, the price is divided among the assets, and buyer and seller report that division consistently to the IRS. The split matters because different assets are taxed differently. The part assigned to goodwill is generally taxed at capital gains rates. The part assigned to equipment you have already depreciated can be taxed as ordinary income. Payments for a non-compete or a consulting agreement are generally ordinary income too. If your business is a C corporation, an asset sale can mean tax at the corporate level and again when the money comes out to you. Sit down with your CPA before you accept an offer, not after.
5. When a stock sale makes sense
Sometimes selling the entity is the better path: when key contracts or licenses would be difficult to transfer, when the business holds government contracts or hard-to-replace permits, or when the company is a C corporation and the tax difference is large. In a stock sale the buyer takes the company as it stands, history included, so expect deeper diligence and stronger promises in the purchase agreement about what the company has and has not done.
The takeaway
Two offers with the same price can leave you with very different amounts once the structure is known. Find out early whether the buyer is proposing an asset or a stock purchase, what you keep at closing, and how the price will be allocated, and settle those points in the letter of intent while you still have room to negotiate.
