Most small-business sales transactions are in the form of an Asset Sale which is great for the Buyer because it limits successor liabilities and offers the maximum depreciation after the sale. Another reason Asset Sales are the most common transactions is many general market Business Brokers are not familiar with or capable of doing a Stock Sale. At Pacific Business Sales we have done many Stock Sales for construction companies and contractors and we explain below why a Stock Sale is important to you as an owner of a construction company and why you need a business broker familiar with both stock sales and construction companies.
The problem with Asset Sales is they aren’t great for the Seller because they result in the maximum tax rate on the sale of the business. While we work with tax strategy CPAs that have methods to defer and minimize taxes, in an Asset Sale you are starting off at a disadvantage.
There is good news though for contractors and construction companies because they have a Contractors’ License, and in the sale of a company with a Contractor’s License, a Stock Sale is the best transaction structure for both Buyer and Seller.
In the acquisition of a licensed Contractor, the Buyer will have to either already have the required Contractor’s License or the Seller will have to act as the RMO (Responsible Managing Officer) until the Buyer obtains their license or another RMO or RME (Responsible Managing Employee). This in itself isn’t a major problem, but there is a problem with an Asset Sale. In an Asset Sale, the Buyer’s new corporation will have to apply for a new Contractor’s License. This creates several issues, 1) it takes from 6 to 8 weeks to obtain a new Contractor’s License 2) the new corporation will be issued a new (different) Contractor’s License which means all contracts will have to be assigned (transferred) to the new corporation and new Contractor’s License and 3) new insurance and bonding must be applied for. This obviously creates a messy and complicated transition, not to mention the problems in approaching customers and suppliers to request contract changes.
In a Stock Sale, the Seller’s corporation remains intact and the Buyer buys the owner’s stock. The owner (Seller) signs over his shares, the Buyer is issued new shares, the Seller resigns as a Director and the Buyer becomes the new Director, President, etc. While there is an ownership change, the corporate entity remains the same and the Contractor’s License, EIN, insurance, Bonds, etc all remain in place (note there are notifications required to insurance and bonds). The RMO also remains the same, although there is paperwork required for the new ownership.
Thus with a Stock Sale, the transition can be seamless and is much more straightforward than with an Asset Sale. Obviously, this is a very compelling reason for a Buyer to do a Stock Sale when acquiring a contractor or construction company.
A Stock Sale can save the Seller over 30% in taxes on the sale of their business and our tax CPA partners can defer and minimize the taxes further. You should consult with your CPA about tax implications on the sale of your business, and if your CPA does not have a tax strategy to defer and minimize your taxes contact us for a referral to our CPA tax experts.
The Stock Sale has huge benefits for you as a Seller but, it is a much more complex transaction. At Pacific Business Sales we have done many Stock Sale transactions for construction companies and we have a team of CPAs and attorneys experienced in these transactions. We also have SBA lenders that will provide SBA financing for construction companies and contractors and are familiar with Stock Sales.
The bottom line is that a Stock Sale will save you taxes and make the transition much easier. But, you will need a Business Broker experienced in both selling construction companies and contractors as well as experienced in Stock Sales.
