Sales of closely held businesses can be divided into two different scenarios: (1) selling a fractional interest, and (2) selling the entire business.
When a business with multiple owners is developing a business succession plan and negotiating a buy/sell agreement, the only practical approach to changes in ownership is to deal with the sale and purchase of fractional interests of the business.
Those fractional interests would be denominated as shares of stock if the business is a corporation, membership interests if it’s a limited liability company, or partnership interests if it is a partnership. That is the practical way to do it. The drawback to that approach, however, is that what a buyer buys is stock, the cost of which will not be not deductible until the buyer sells the stock to somebody else, or liquidates the business.
On the other hand, the succession plan may involve selling the entire business, to its management team, to a competitor in the same line of business, or to a non-competitor that wants to expand into the selling business’s market.
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No matter who the buyer is, when an business is being sold a new consideration arises: public liability. If the buyer buys the stock of the corporation, not only does the buyer not get to deduct the cost of the stock until the buyer becomes the seller and sells the business to someone else, the buyer is also buying whatever liability tail might exist for prior actions (e.g. product liability) of the business.
That is something a buyer would wish to avoid. Therefore, the buyer of the entire business will want it to be an asset purchase, not a stock purchase. That is, the buyer will buy whatever plant and equipment it needs from the existing business, along with intangibles (customer lists, the right to use the trade name, logos, service marks, etc.), leaving what it doesn’t want – including liability for prior acts — behind with the seller.
The seller, unless it has other business operations, will likely be left with the proceeds of the sale (which may include an installment note from the buyer), some assets the buyer didn’t want, and a few leftover bills the buyer did not want to assume. The seller, having no other business operations and no other reason to continue in existence, will then wind up operations and liquidate.
In liquidating, the stockholders will turn their stock in to the corporation and take, in exchange, their proportionate shares of the remaining assets. The state in which the business is chartered will then take back the business’s right to do business and the business will cease to exist.
An asset sale probably will have tax consequences that will affect the selling price. Had the buyer bought the stock of the seller, the seller would have realized a capital gain. However, selling depreciable plant and equipment may force the seller to recognize ordinary income from depreciation recapture.