Selling a Business: A Menu of Options

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Understanding the options for exiting a business are important not only when an owner is ready to retire or move onto other things, but also during the initial start-up phase. Being conversant with the various opportunities, options, and obstacles involved in selling a business is a crucial skill for business owners and advisors alike. 

In this course we will address the following issues:

  • Asset Sale vs. Stock (Ownership) Sale
  • Tax Consequences on the Sale of a Business
  • Rollover Equity and “Type F Reorgs”
  • Code Section 338(h)(10) Transactions
  • Business Brokers and Other Selling Avenues
  • Selling to Employees or Family Members
  • Essential Documents
  • The Due Diligence Process
  1. Introduction
  2. Content of Course 00:03:22
  3. Importance of Planning & Structure 00:06:41
  4. MakRic Enterprises, Inc. v. CIR (2017) The Importance of Structure - Purchase 00:07:58
  5. MakRic Enterprises, Inc. v. CIR (2017) The Importance of Structure - Distribution 00:011:07
  6. Asset Sale vs. Stock Sale 00:13:51
  7. Asset Sale 00:14:24
  8. Stock Sale 00:16:39
  9. Liability Concerns in Asset Sales 00:19:01
  10. Tax Consequences 00:22:31
  11. Characterization of Gain 00:22:56
  12. Capital Gains Rates 00:27:00
  13. Other Tax Rates 00:27:44
  14. Netting of Gains and Losses 00:29:52
  15. Capital Loss Carryovers 00:33:43
  16. Sale of S Corporation Stock 00:34:19
  17. Pre Sale Distribution to S Shareholders Combined with Installment Sale 00:39:39 
  18. Partnership Basis Adjustments 00:42:01
  19. Allocation with Asset Sales 00:45:42
  20. Covenants Not To Compete 48:07
  21. Employment Agreements 51:37
  22. Goodwill 00:53:27
  23. Individually-Owned Goodwill 00:55:30
  24. Effect of Debt 00:57:31
  25. Rollover Equity and “Type F Reorgs 01:0:01
  26. Private Equity Fund Wants to Acquire Target (an S Corporation) 00:00:53
  27. Investment Rollover Example 01:01:23
  28. Investment Rollover Example Con’t. 01:03:05
  29. Investment Rollover Example Con’t. 01:04:25
  30. Investment Rollover Example Con’t. 01:06:21
  31. Investment Rollover Example Con’t. 01:06:58
  32. Investment Rollover Example Con’t. 01:09:20
  33. Investment Rollover Example Con’t.01:09:37
  34. Investment Rollover Example Con’t. 01:11:11
  35. Code Section 338(h)(10) Elections 01:11:20
  36. §338 Elections 01:11:31
  37. §338 Elections Not Favored 01:12:48
  38. §338(h)(10) Commonly Used 01:13:25
  39. Stock Purchase 01:14:38
  40. 338(h)(10 Election 01:15:16
  41. Business Brokers 01: 19:55
  42. Advantages of Using Brokers 01:
  43. Disadvantages of Using Brokers 01:20:05
  44. Selling to Employees or Family 01:24:21
  45. Considerations 01:24:28
  46. Essential Documents 01:27:52
  47. Confidentiality Agreements 01:27:55
  48. Confidentiality Agreement Example 01:30:20
  49. Letters of Intent 01:33:04
  50. Agreement of Sale 01:34:11
  51. The Due Diligence Process 01:39:59
  52. The Due Diligence Process - Preliminary Evaluation 01:37:05
  53. The Due Diligence Process - Formulating The Due Diligence Program 01:38:47
  54. The Due Diligence Process - Perform Compliance-Oriented Procedures 01:39:50
  55. Other Considerations 01:40:57
  56. Thank You 01:41:53
  57. Presentation Closing 01:42:18
  • Chuck Borek

    Chuck Borek

    Chuck Borek is a practicing attorney and founder of  the Borek Group, LLC. Chuck is also a CPA, and his background includes  five years as a partner in a public accounting firm. He received his law degree and MBA summa cum laude from the University of Baltimore in 1993, where he was editor [...]

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  • 1377 Election 00:38:28
  • 338 Election 01:11:26
  • 754 Election 00:42:08
  • Amortization 00:49:13m 00:54:04
  • Asset 00:20:14 00:22:26, 00:42:53, 00:54:09, 01:06:49, 01:13:40
  • Asset Sale 00:03:44, 00:13:57, 00:20:07, 00:48:14, 01:11:51
  • Buyer 00:04:32, 00:20:11, 00:46:20, 00:54:58, 00:33:11
  • Capital Gain 00:25:05, 00:30:30, 00:33:51, 01:18:09
  • Capital Losses 00:25:10, 00:7:34, 00:33:50
  • C Corporation 00:27:05, 00:54:55, 01:12:36
  • Code Section 1245 00:16:11
  • Code Section 338(h)(10) 00:04:54, 01:11:33, 01:14:36
  • Depreciation 00:28:29, 00:29:05, 00:54:08
  • Fair Market Value (FMV) 00:43:22, 00:53:47
  • Form 8594 0.0:46:24
  • Liability 00:18:56, 01:06:38
  • Limited Liability Company (LLC) 00:03:56, 00:14:16, 00:58:27, 01:06:26
  • Pro Rata 00:35:23
  • Rollover Equity 00:04:23
  • S Corporation 00:34:23, 00:35:16, 00:39:49, 01:01:11
  • Shareholder 00:35:54, 00:55:17, 00:58:20
  • Stepped-Up Basis 01:12:47, 01:16:34
  • Stock Sale 00:03:45, 00:13:58, 00:48:14, 01:11:58
  • Straight Line Depreciation 00:28:59
  • Transaction 00:32:31, 01:15:17
  • Type F Reorganization 00:04:26

1377 Election: A 1377(a)(2) election allows the shareholder who terminated his or her interest in the S-corporation to recognize only the pro rata share of items attributable to the portion of the year though the termination date.

338 Election: By making a section 338(g) election, a domestic corporate purchaser typically enjoys a step-up in basis in foreign target assets, eliminates historic U.S. federal income tax attributes (e.g., earnings and profits and foreign tax pool) and closes the foreign target's tax year. A corporation that purchases at least 80 percent of the total voting power and value of the stock of another corporation (the target corporation) within a 12-month period can make a Section 338 election to treat the stock purchase as a purchase of the target corporation's assets.

754 Election: Section 754 of the tax code allows partnerships to adjust their tax basis to prevent new partners from paying taxes on gains and losses they didn't benefit from.

Amortization: An accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It also refers to the repayment of loan principal over time. (investinganswers.com)

Asset: Property owned by a person or company, regarded as having value and available to meet debts, commitments or legacies.

Asset Sale: An asset sale is the purchase of individual assets and liabilities. In an asset sale, the seller retains possession of the legal entity and the buyer purchases individual assets of the company, such as equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, telephone numbers, and inventory. Asset sales generally do not include cash and the seller typically retains the long-term debt obligations. This is commonly referred to as a cash-free, debt-free transaction.

Buyer: Someone whose job is to choose and buy the goods that a store will sell

C Corporation: A C corporation, under United States federal income tax law, refers to any corporation that is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately. Most major companies are treated as C corporations for U.S. federal income tax purposes.

Capital Gain: Capital gain is an economic concept defined as the profit earned on the sale of an asset that has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares.

Capital Losses: A capital loss occurs when there is a “sale or exchange” of a “capital asset” at a loss.

Code Section 1245: Section 1245 Property is any new or used tangible or intangible personal property that has been or could have been subject to depreciation or amortization. Examples of tangible personal property are machinery, vehicles, equipment, grain storage bins and silos, blast furnaces, and brick kilns.

Code Section 338(h)(10): Code Section 338(h)(10) allows the parties in a sale of stock of a corporation to treat the transaction for federal income tax purposes as if it had been structured as an asset sale.

Depreciation: A reduction in the value of an asset with the passage of time, due in particular to wear and tear.

Fair Market Value (FMV): The term fair market value is used throughout the Internal Revenue Code among other federal statutory laws in the USA including Bankruptcy, many state laws, and several regulatory bodies. In litigation in many jurisdictions in the United States, the fair market value is determined at a hearing.

Form 8594: Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets and if the purchaser's basis in the assets is determined only by the amount paid for the assets.

Liability: In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

Limited Liability Company (LLC): An LLC is a corporate structure where members cannot be held accountable for the company’s debts or liabilities. This can shield business owners from losing their entire life savings if, for example, someone were to sue the company. Can be a single member (much like a sole proprietor) or a multi-member. It shares certain traits of both corporations as well as partnerships or sole proprietorships. It is not a corporation.

Pro Rata: Pro rata refers to a proportional allocation. Under this approach, amounts are assigned based on each participant's proportional share of the whole. In accounting, this means revenues, expenses, assets, liabilities, or other items are proportionally allocated among participants.

Rollover Equity: Rollover equity refers to a portion of the proceeds from the sale of your business that you reinvest into the company the buyer uses to acquire their business

S Corporation: An S corporation, for United States federal income tax, is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any income taxes.

Shareholder: A shareholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders may be referred to as members of a corporation.

Stepped-Up Basis: Step-up in basis, or stepped-up basis, is what happens when the price of an inherited asset on the date of the decedent's death is above its original purchase price. The tax code allows for the raising of the cost basis to the higher price, minimizing the capital gains taxes owed if the asset is sold later.

Stock Sale: A stock sale is the purchase of the owner’s shares of a corporation. Through a stock sale, the buyer purchases the selling shareholders’ stock directly thereby obtaining ownership in the seller’s legal entity. The actual assets and liabilities acquired in a stock sale tend to be similar to that of an assets sale. Assets and liabilities not desired by the buyer will be distributed or paid off prior to the sale. Unlike an asset sale, stock sales do not require numerous separate conveyances of each individual asset because the title of each asset lies within the corporation.

Straight Line Depreciation: Straight line depreciation is the most commonly used and straightforward depreciation method for allocating the cost of a capital asset. It is calculated by simply dividing the cost of an asset, less its salvage value, by the useful life of the asset.

Transaction: In QuickBooks, a transaction type identifies what kind of transaction occurred, such as a customer transaction, bill payment or a bank transfer. When you submit a transaction, you type in a transaction code to represent it.

Type F Reorganization: An F-reorganization is a type of typically tax-free reorganizational structure that often involves a target company taxed as an S-corporation. The F-reorganization is so named because it involves a change in “form” of the target, while not changing the substance of the target for tax purposes.

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Frequently Asked Questions

The choice between structuring a business sale as an asset sale or a stock sale has major tax, legal, and practical implications for both buyers and sellers. In an asset sale, the buyer purchases specific assets and assumes specific liabilities of the business — typically excluding cash and long-term debt — rather than acquiring the legal entity itself. The buyer receives a stepped-up tax basis in the acquired assets, allowing for larger depreciation and amortization deductions going forward. In a stock sale, the buyer acquires the seller's ownership interest in the corporation directly, taking on the entity including all historical liabilities. The buyer inherits the entity's existing tax basis in its assets, which may be significantly lower than fair market value. Sellers generally prefer stock sales because the entire gain can be taxed at favorable long-term capital gains rates, and they are released from the entity's ongoing liabilities. Buyers generally prefer asset sales because of the basis step-up and the ability to cherry-pick assets and liabilities. The tension between seller preference for stock sales and buyer preference for asset sales is one of the central negotiating dynamics in business transactions, and tax planning strategies such as Section 338(h)(10) elections offer potential solutions in specific circumstances.
The tax consequences of selling a business depend heavily on the structure of the transaction, the type of entity being sold, and how the purchase price is allocated among different asset categories. In an asset sale, different asset classes are taxed at different rates: the gain on depreciable personal property (Section 1245 assets) and real property depreciation recapture are taxed as ordinary income, while the gain on capital assets such as goodwill, going concern value, and certain intangibles is taxed at preferential long-term capital gains rates. Purchase price allocation between the buyer and seller must be reported consistently on Form 8594. In a stock sale, the seller generally recognizes capital gain (or loss) equal to the difference between the sale proceeds and their adjusted basis in the stock — often taxed at lower long-term capital gains rates if the shares were held more than one year. S corporation stock sales have specific rules including potential built-in gains implications. Covenants not to compete and employment agreements negotiated as part of the sale are taxed as ordinary income to the recipient. Given the complexity of business sale taxation, engaging experienced M&A tax counsel well before the transaction is essential to optimize the after-tax outcome for all parties.
Rollover equity refers to a transaction structure in which the seller of a business reinvests a portion of their sale proceeds back into the acquiring entity — typically a private equity-sponsored holding company — rather than cashing out entirely. This structure is commonly used when private equity firms acquire businesses, particularly closely held companies and S corporations. From the buyer's perspective, rollover equity aligns the seller's ongoing incentives with the success of the post-acquisition business and signals the seller's confidence in the company's future performance. From the seller's perspective, rollover equity provides an opportunity to participate in the upside if the PE firm grows the business and sells it at a higher valuation — the so-called second bite of the apple. The tax structuring of rollover equity transactions is complex: a properly structured rollover may qualify for partial non-recognition treatment, deferring taxes on the rolled-over portion. Type F reorganizations are often used to convert an S corporation target into a structure compatible with PE acquisition and rollover equity mechanics. Sellers considering a PE transaction with rollover equity should engage both M&A legal counsel and experienced tax advisors early to understand the economic and tax implications of different rollover structures and percentages.
Due diligence is the buyer's systematic investigation of the business being acquired to verify the accuracy of representations made by the seller and assess the risks, liabilities, and opportunities associated with the transaction. A comprehensive due diligence process typically covers financial, legal, operational, tax, and HR dimensions. Financial due diligence examines historical financial statements, quality of earnings, working capital trends, debt obligations, and the sustainability of revenue streams. Legal due diligence reviews contracts, leases, pending or threatened litigation, intellectual property ownership, and regulatory compliance. Tax due diligence assesses exposure to federal, state, and local tax liabilities — including income tax, payroll tax, and sales tax — that may not be fully reflected on the financial statements. Operational due diligence evaluates the quality of the management team, key employee dependencies, customer concentration, and operational infrastructure. HR due diligence covers benefit plan liabilities, employment agreements, non-competes, and potential employment law exposure. For sellers, being well-prepared for due diligence — organizing documents, addressing known issues proactively, and anticipating buyer questions — significantly accelerates the transaction timeline and reduces the risk of renegotiation or deal failure during the due diligence period.
Selling a business to employees or family members is a common succession strategy that keeps ownership within a trusted group and can preserve the business's culture and legacy. Several structures are available for internal transfers. Employee Stock Ownership Plans (ESOPs) allow a company to be sold to a trust for the benefit of employees, often with significant tax advantages for the selling owner under certain conditions, including potential deferral of capital gains through an IRC Section 1042 election for C corporation sales. Management buyouts allow key executives to acquire the business, typically using a combination of seller financing, bank debt, and equity investment. Installment sales to family members or key employees allow the purchase price to be paid over time, making the transaction accessible to buyers who lack immediate capital, while providing the seller with a stream of income and potential estate planning benefits. Gifting partial interests over time combined with a partial sale is another estate planning-oriented approach. Each of these options has distinct tax, legal, and financial implications that must be carefully analyzed. The success of an internal sale also depends heavily on the readiness of the buyer — ensuring that the next generation of leadership has the skills, capital, and commitment needed to sustain the business through ownership transition.