Introduction
When it comes time to sell your business, your decision is more than just walking away with a paycheck—it’s about preserving the value you’ve built, protecting your employees and customers, and creating a smooth transition. One of the most strategic and potentially rewarding exit paths is selling your business to another corporation. Corporate buyers are often better positioned financially and strategically to pay a premium for a well-run business. Whether they’re looking to expand into new markets, eliminate competition, or acquire valuable assets or talent, corporations can be motivated and capable buyers.
However, selling to another corporation also comes with its own set of complexities. From navigating mergers and acquisitions (M&A) to evaluating offers that include stock instead of cash, the process can be both legally and financially intricate. Understanding the motivations of corporate buyers, the pros and cons of different deal structures, and the potential tax consequences is crucial to getting the best outcome. This guide is designed to help you assess whether selling to a corporation is right for you—and how to do it smartly and successfully.
What is selling to another corporation?
Once you’ve decided to sell your business, one of your most important jobs will be finding a buyer and getting the best possible deal. Finding an appropriate buyer may require you to evaluate different kinds of potential buyers and target those who would most likely have some interest in purchasing your business. One option you might want to consider is selling your business to another corporation. Any corporation interested in buying your business–whether it be a large, publicly owned corporation or a small private firm–will have its own strategic reasons for wanting to do so. For example, the purchasing corporation might want to expand its market, eliminate competition, or acquire your business’s assets and real estate location.
Selling to another corporation involves exchanging your business’s assets or corporate stock for either cash or stock (or both) in the acquiring corporation. Tax consequences and other issues will depend largely on the form of payment you receive. A tax advisor and/or attorney can help you structure the sale so as to maximize your profit.
Selling for cash
A cash sale occurs when you simply sell your business’s stock or assets to the acquiring corporation for cash. While cash is certainly the safest and most liquid form of payment you can receive, a cash sale is not without problems. Insisting on an all-cash sale can narrow your pool of potential buyers and force you to lower your sale price. Moreover, receiving all cash may have serious tax consequences. All-cash sales are less frequent when compared to transactions that involve cash in combination with stock or other forms of payment.
Selling for stock
Selling for stock means that you exchange your business’s assets or corporate stock for stock in the acquiring corporation. While owning stock in the acquiring corporation exposes your money to the vagaries of the stock market, it also creates the potential for a greater return on your money. The acquisition of your company could even increase the value of the acquiring company’s stock.
Questions to consider before accepting stock as payment include the following:
- Is the acquiring corporation’s stock publicly traded?
- Will the stock you receive be voting stock, and will it be common or preferred stock?
- Will there be a waiting period before you can sell the stock?
The tax consequences of selling for stock will depend on whether you sell or hold onto the stock. Tax-free asset sales and tax-free stock sales are a possibility if you hold onto the stock.
Mergers and acquisitions (M&A)
A merger is the process of joining the assets and liabilities of your company with those of another company. This can result in the formation of an entirely new corporation (sometimes called a consolidation) or the absorption of one company into the other (merger). An acquisition occurs when another company purchases your company and runs it as a subsidiary under a larger corporate umbrella. Choosing one of these options may result in an all-cash buyout but will more likely involve some kind of stock swap. Although structuring M&As can be complicated and time-consuming, they offer certain tax benefits and may allow you to retain an ownership position if you don’t want to completely sever all ties with your business.
When can you do it?
You can sell your business to another corporation as long as you own a viable, marketable business and are willing to sell it to a corporate entity rather than to an individual or private party. Because all-cash buyouts are not that common, you should also be willing to accept payment in the form of corporate stock or a combination of stock and cash.
Strengths
Selling to a corporation can be more profitable
Corporations, particularly large ones, tend to have more disposable capital than private parties. They also tend to take a more strategic, long-term approach. They look beyond immediate profits and focus on potential future gains that can be realized through the acquisition of other companies. For these two reasons, a corporation will probably be willing to pay a higher price for a viable business than would a private party with limited capital and a more short-term approach. Also, a private party would likely have to finance the purchase of your business, while most corporations would not. Thus, selling to a corporation might be better if you need money and want to receive payment in one lump-sum distribution.
You may be able to retain some control
If you structure the sale of your business as an M&A transaction, you may be able to balance your desire to sell with your desire to retain some control. If you don’t want to cash out entirely and pursue something else, an M&A transaction may give you expansion capital for your business while at the same time allowing you to retain an ownership position.
Tradeoffs
Selling to a corporation can be complicated and expensive
Selling your business to another corporation can be complicated and time-consuming. Long, drawn-out negotiations over the price and terms of the sale may go nowhere until the desired sale finally falls through. The wasted time and energy, coupled with the expense of hiring advisors, may not be worth it in the end. In the case of a complex M&A transaction, the process of structuring and negotiating the sale to both companies’ satisfaction can be a long and difficult process.
It can be difficult to find a corporate buyer
Corporations have strategic reasons for everything they do. They want to make cost-effective purchases. As a result, they tend to be picky when it comes to acquiring other companies. In general, most corporations only consider buying companies that have solid track records, strong market positions, and promising growth potential. Thus, you may have difficulty finding a corporation that wants to buy your business, especially if your business has been less than a star performer in its industry. Depending on your business’s level of success, you may find that the only way you can sell to a corporation is by liquidating your business and selling the assets at a discounted price to another company in the same industry.
There can be disadvantages to receiving stock as payment
More often than not, selling to a corporation will require you to accept the corporation’s stock as partial or full payment for your business. Receiving stock can prove to be a boon on the one hand if the value of the stock rises over the long term. Nevertheless, owning the stock exposes you to all the risks and anxieties that come with being a stock market investor. In addition, while stock in general is a relatively liquid asset, federal securities regulations may require you to hold onto the stock received from the acquiring corporation for a period of up to two years before you can sell it, depending on various circumstances.
How to do it
Hire an attorney and/or tax advisor to assist you with planning the sale. Take the necessary steps to prepare your business for sale. Determine the value of your business, perhaps through a professional appraisal. Find a corporation interested in purchasing your business. Negotiate a sale price as well as form(s) of payment. Once you have reached an agreement, have your attorney(s) draw up the documentation outlining the terms.
Tax considerations
Generally speaking, the sale of your business to another corporation will trigger a capital gain whether you receive cash or stock as payment. This means that you will pay taxes on the difference between your initial investment in your business and the price the acquiring corporation paid for it. The exact amount to be paid will depend on how you structure the sale and can be very high in some cases. For example, if you sell your business’s assets and realize a gain, you may pay more in taxes than if you sell stock because part of the gain may be taxable at a higher rate as ordinary income. Selling your business for all cash could cause your entire capital gain to be taxed for the year in which you receive the funds, thus putting you in an even higher tax bracket.
Conclusion
Selling your business to another corporation can open the door to opportunity, growth, and financial reward, but it also introduces complexities that require careful planning. On the upside, corporate buyers often have the capital and vision to pay a premium for the right business. They may offer you not just a sale but a strategic partnership, continuity for your team, and even a continued role for yourself. Depending on how you structure the transaction, you may benefit from potential tax advantages, future stock growth, and long-term relationships that keep you connected to your legacy.
At the same time, the process can be demanding. Negotiating terms, understanding stock offers, complying with regulatory requirements, and navigating the due diligence process all require the help of skilled professionals. While corporate buyers can offer great deals, they are also discerning and driven by long-term strategy, meaning they won’t buy unless the fit is right.
If you’re considering this route, the key is preparation. Align your business for acquisition, understand your valuation, consult with your tax and legal advisors, and be ready to evaluate complex offers. With the right planning and support, selling to a corporation can be a powerful way to capitalize on the business you’ve built while setting it—and yourself—up for long-term success.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
