If your company is organized as a C corporation and you are considering a sale of your dealership or other assets, there are two basic alternatives for structuring the deal: as an asset sale or as a stock sale. Each alternative has its own benefits and drawbacks.

When a C corporation undertakes an asset sale, any gain on the sale of assets will be recognized as income, which is subject to corporate tax. In addition, if the dealership has been using the LIFO inventory method, the problem will be aggravated by recapture of any LIFO reserve, which will also be recognized as taxable income. Obviously, the impact of corporate taxes stemming from an asset sale can substantially reduce the net proceeds to shareholders.

For this reason and others, a seller’s advisors will often recommend a stock sale if a buyer can be found. However, the offer price for the stock of the corporation will usually be substantially lower than what the same buyer would offer to purchase the corporation’s assets.

There are a couple of reasons for this. For starters, the buyer may be taking on additional risk by inheriting potential contingent or unknown liabilities associated with the prior operation of the business.  Another factor is that in a stock transaction, the buyer recognizes that he/she will be inheriting the (presumably low) tax basis on the assets of the corporation, as opposed to starting fresh with a stepped-up basis equivalent to the price paid for the assets. Without a step-up in basis and the ability to fully write down the business’ assets over time (offsetting taxable income), a buyer’s cash flow will be lower; thus, the offer price for stock will be reduced, or “tax-affected.”

The third way

Fortunately, there is a solution that can help the seller resolve many of the problems associated with the sale of a dealership as an asset sale.

A number of third-party organizations specialize in the acquisition of closely-held corporations with realized or unrealized gains. In many cases, the third party seeks out corporations that have sold operating assets (such as dealerships) as well as real estate. A sale of stock to one of these third-party organizations often adds substantial economic value for shareholders and provides a unique opportunity to manage risk and maximize returns.

The C corporations most likely to benefit from a sale of stock to a third party are those that are privately held, own highly appreciated real estate, are personal holding companies (PHCs) with appreciated assets, and/or have recognized gains from:

• The sale of assets
• The sale of one or more subsidiaries
• The sale of real estate
• A private sale
• An eminent domain condemnation
• The sale of marketable securities (for PHCs)
• Proceeds from a lawsuit or insurance settlement
• Recapture of LIFO reserves
• Recapture of accelerated depreciation

The common issues surrounding C corporation transactions have derailed the plans of countless business owners over the years. This unique win-win solution to these problems can provide business owners the profitable sale they seek.