Stock sale Vs Asset sale

Stock Sale - Allocation of Purchase Price
In a stock sale, the corporation is the legal "owning entity" of the company, and the purchase price may be allocated completely (100%) to the sale of the stock. However, in tightly held non-public corporations, the purchase price is frequently allocated to the company's stock in addition to "service contracts" or "service agreements" such as:
1. Value of the stock
2. 2) Value of the Covenant Not to Compete, which is provided the buyers from key individuals selling the corporate stock
3. 3) Value of Training, which is provided the buyers are the key individuals selling the corporate stock who also manage / operate the company
Due to the current U.S. tax structure, sellers usually prefer to have most (if not all) of the purchase price allocated to the value of the stock, since that is usually taxable at Capital Gains tax rates, and that tax rate currently is usually much more favorable than the seller's Ordinary income tax rate. Of course, buyers usually prefer to minimize the value attributed to the stock in order to place larger values to the Covenant No to Compete and the Training & transition, since the covenant and training values allow the buyers to "write off" those portions of the overall purchase price.
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points - Allocation of Purchase Price





Non-Stock Sale - Allocation of Purchase Price
When the buyers are purchasing the tangible and intangible assets from a corporation, or purchasing the business from a sole proprietor, a partnership, and LLC or LLP, the purchase price is usually allocated to some, or all, of the following components:
1. Tangible Personal Property (trade fixtures, furniture, equipment)
2. Leasehold Improvements
3. Value of Premise Lease (if the lease is at or below market rent)
4. Covenant Not to Compete (include time and distance of covenant)
5. Training and Transition (include schedule of time, hours, etc.)
6. Liquor License (include license type and number)
7. Customer List
8. Goodwill
9. Buildings
10. Land
11. Inventory
The total value allocated to all of the appropriate assets should equal the total of the purchase price. IRC Section 1060 further delineates specific items included in each of the seven "classes" of assets.
Please be aware in states that collect sales tax on both (1) the tangible personal property and sales tax associated with (2) the transfer of vehicle licenses, it very important that the value of the Registered (licensed) Vehicles not be included with the other Tangible Personal Property on the allocation, lest the escrow officer may inadvertently collect sales tax on the licensed vehicles in escrow while the buyer will again have to pay sales tax to the licensing department when they re-register the vehicles to the new owners / buyers.
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points

Tax Implications - General Guidelines
(AS OF JANUARY 2001, FEDERAL TAXES ONLY; STATE TAXES ADDITIONAL)
STOCK SALES
Value placed on Stock:
1. Seller: Capital gains tax rate (currently at 15%) for stock held more than one year
2. Buyer: No write off; must accept assets at current book value (i.e., existing depreciation schedule)
Value placed on Covenant Not to Compete:
1. Seller: Ordinary income to recipient (is considered personal to seller / principal)
2. Buyer: Amortize value over 15 years
Value placed on Training / Consulting Agreement:
1. Seller: Ordinary income to recipient
2. Buyer: Expense out as paid
Non-Stock ("asset") Sales
Value placed on Tangible Personal Property (trade fixtures, furniture, equipment):
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
2. Buyer: Established basis, depreciate per IRS schedules
Value placed on Premise Lease savings (if the lease is at below market rent, it is an intangible asset):
1. Seller: If held for more than one year, is long-term capital gain
2. Buyer: Amortize value over 15 years
Value placed on Covenant Not to Compete (include time and distance of covenant):
1. Seller: Ordinary income as received
2. Buyer: Amortize over 15 years
Value placed on Training/Consultation (include schedule of time, hours, etc.):
1. Seller: Ordinary income as received
2. Buyer: Expense out as paid
Value placed on Registered Vehicles (do not include in Tangible Personal Property above:)
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
2. Buyer: Established basis, depreciate per IRS schedules
Value placed on Liquor License (include license type and number; is an intangible asset):
1. Seller: If held for more than one year, is long-term capital gain
2. Buyer: Amortize over 15 years
Value placed on Customer List:
1. Seller: Ordinary income as received
2. Buyer: Amortize over 15 years
Value placed on Goodwill:
1. Seller: If held for more than one year, is long-term capital gain
2. Buyer: Amortize over 15 years
Value placed on Buildings:
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
2. Buyer: Establishes basis, depreciate per IRS schedules
Value placed on Land:
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain, otherwise ordinary income
2. Buyer: No immediate tax impacts
Value placed on Inventory:
1. Seller: Ordinary income, to the extent that is over basis
2. Buyer: Treated as "cost of goods sold" upon sale of products
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points - Allocation of Purchase Price


Key Points - Allocation of Purchase Price
Consistency between the seller and buyer in their reporting of the allocation is important. Work with professionals (licensed and/or accredited Brokers, CPA's, attorneys) in these transactions to save you time and money down the line. Tax laws change frequently, so treat this article as a guideline subject to change by the IRS, and subject to interpretation by the appropriate professionals/advisors.
The larger the transaction the more likely there will have to be a formal valuation some, or many of the various asset values may be indicated.
About the AuthorJim Pease, CPA, is a licensed CPA in the state of California, and is a principal at W. H. Mayer Accountancy Corporation in Pleasanton, CA. He specializes in taxes, business accounting, business valuation and business acquisitions/sales.
Ron Johnson, CBI, MM&AI, Fellow of the IBBA, is president of Allen Business Investments and principal of Onyx Associates, both in San Ramon, CA. Allen Business Investments specializes in the sales of Main Street businesses, in the sales of non-public firms with revenues less than $10 million. Onyx Associates is a mergers and acquisitions firm specializing in privately-held companies with revenues up to $50 million. Ron is a past president of the California Association of Business Brokers (CABB), and an active member of the International Business Brokers Association (IBBA). You can email Ron at ron@abi.nu.
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points - Allocation of Purchase Price