I love diversifying cash flows. To be as secure and practically diversified, I believe cash flow from real estate, stocks, bonds, and businesses are needed. The last item listed, cash flow from businesses, can be the riskiest and time-intensive, but it’s worth considering nonetheless. If you are ever considering acquiring a business, below are the two most common ways to structure an acquisition:
- An equity/stock deal where you buy an entire company;
- An asset deal where you buy specific assets of a business in a new or existing business.
Both parties involved with the deal typically benefit from opposing structures. In general, sellers prefer a stock deal, while buyers prefer an asset deal. When the transaction is structured to be a stock deal, the acquisition results in a transfer of the ownership of the business entity itself where the business continues to own and operate with the same assets and liabilities. Stock deals are generally more tax-friendly to the seller as the transaction typically gets long term capital gain treatment on the sellers payday. Long term capital gains are a reduced tax rate. A buyer may not love this structure however because they often assume liabilities of the legacy company and have limited depreciation on the assets acquired.
Asset deals are in some ways more complicated than stock deals. The seller remains the owner of the business entity selling the assets; the buyer purchases individually agreed-upon assets like inventory, equipment, and customer lists. The buyer typically prefers this structure as less pre-existing liability is assumed and certain acquired assets can be depreciated more favorably. When buying a business as an asset acquisition, you will have to allocate your purchase price to the assets for the IRS on form 8594, which can be quite the undertaking for the tax professional and attorneys.
Whether you are the seller or the buyer, as your sworn fiduciary, I would be happy to advise you on the best way to maximize value and tax efficiencies for your financial plan (and retirement plan for that matter). As always, we are here for anything you would like to discuss.