Another important question to address when negotiating a sale is whether the deal should be structured as an asset or stock sale.

Asset sales. The buyer gets to cherry-pick the most desirable assets from the seller’s balance sheet. That way the buyer isn’t saddled with the seller’s liabilities.

In addition, the depreciation and amortization of long-term assets starts anew, based on their current market values. That lowers the buyer’s future tax obligations compared to a stock sale.

Contracts, licenses and loans also must be renegotiated in an asset sale.

Stock sales. The seller’s equity transfers to the buyer so the business continues to operate uninterrupted.

Sellers generally prefer stock sales, because shareholders’ proceeds are taxed at long-term capital gains tax rates, which are lower than ordinary income-tax rates.

By comparison, sellers usually pay more tax on asset sales, because these proceeds are typically taxed as a combination of ordinary income and capital gains.

Deal structure is an important consideration to understand before sitting down at the negotiating table.

Ask us, your tax professional, to calculate your after-tax sales proceeds under different scenarios to find the option that works best for you and your buyer.