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What’s Included In The Price Of A Business For Sale?

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When investigating the acquisition or sale of a business, one of the key questions should be, “What’s included in the price?” The answer is not as intuitive or obvious as many would think. Of course each business acquisition is unique and negotiable but this article highlights the more common topics to be addressed when determining what is included in the price of a business sale.

 

The first step in determining what is included in the price of a business is to determine if the sale is an asset sale or stock sale. This is a very important issue because it not only establishes what is included in the price of a business from a tangible and intangible asset perspective financially but clarifies what legal liabilities will or will not be transferred as part of the sale. Naturally, the issue of asset sale verse stock sale can be a matter of negotiation as well.

 

Typically, asset purchases include, as the name implies, just the assets of the business and none of the liabilities. Not so obvious however is that in a typical small business asset sale, the cash accounts and often the accounts receivable are excluded from the purchase and not included in the price. Therefore, in an asset sale the buyer acquires all the assets of the business, both tangible and intangible, less cash, ARs or any liabilities/debt. The business is acquired debt free except for any acquisition financing used by the buyer to acquire the business.

 

The alternative to an asset sale is a stock sale in which case all assets and liabilities of the company are purchased without adjustment to the company balance sheet. In the case of a stock purchase, the liabilities acquired include both known and unknown liabilities. For example, a future law suit related to the sale of a product in the past may be unknown at the time of the purchase but become the liability of the new owner. There are also significant tax implications of an asset verse stock sale that must be reviewed with a qualified accountant. Stock sales are usually necessitated when a critical license, permit or some other critical asset belongs to the legal entity and cannot be transferred through an asset sale. An FDA license belonging to a corporation would be a good example where a stock purchase might be warranted.

 

Small business and lower, middle market business sales and acquisitions are overwhelmingly completed as an asset sale or purchase. The reason is simple, the buyer does not acquire any unknown liabilities. In this case, the purchase price will exclude any liabilities, cash and perhaps accounts receivables. For larger business acquisitions, the buyer often prefers to include a minimum amount of working capital included in the price, so there will need to be some negotiation of the target value of cash plus accounts receivables less accounts payables at the time of closing.

 

The asset purchase price will also include all other assets such as tradenames, trademarks, customer lists, web sites and domain names, furnishings, fixtures, equipment, inventory, patents, etc. The price should also include some form of con-compete agreement and training but these need to be defined. Usually the price includes all furnishings, fixtures and equipment free of encumbrances but this can be negotiated and sometimes the assumption of equipment leases/loans can be a source of financing the acquisition. An asset sale also requires the buyer and seller to agree on the value of depreciated assets to be acquired which has tax implications to both buyer and seller.

 

One of the common issues that can be fairly challenging is determining the value and nature of inventory included in the price, particularly for wholesale or retail businesses involving significant inventory values.  The value of inventory included in the price should reflect the cost to the seller and not the market value. Secondly, both the buyer and seller will need to agree on what is considered “sellable” and what might be considered “obsolete.” It is also possible that the business may be carrying excess inventory when sales have been depressed, particularly in recent touch economic conditions. In such instances, depending on how the seller arrived at the price, there may need to be an adjustment to account for obsolete or excess inventory. However, if the price only included a specific and appropriate amount of “sellable” inventory, then an adjustment to the price may not be necessary.