Selling your dealership: assets vs. corporate stock
NOTE: The following article is from the collection of articles in our Automobile Dealership Buy/Sell Newsletters. The newsletter deals with the complex area of buying and selling automobile dealerships. Some of the material may not be up to date because of changes in the law from the date shown at the end of the article. This article is not to be taken as legal, accounting, tax, or other advice. You should consult your own professionals for such advice and for any updating of the information provided.
How much can I sell for? How much do I get to keep after taxes? These are probably the key questions most owners have once a sell decision has been made.
The final answer has too many variables for the scope of this article. This article deals with a comparison of selling assets versus selling the existing corporation.
Historically, the sale of an existing corporation (corporate stock) has not been usual in the automobile industry. However, there are significant advantages to the seller. Serious consideration should be given this method where possible.
Some of the advantages are:
- A single, simpler transaction, resulting in a capital gain on sale of stock.
- Avoidance of LIFO inventory recapture.
- Avoid corporate-level tax on gains from asset sale. This will usually not be an issue if the corporation is an S-Corporation and made its election prior to 1987.
- Avoid the after-sale liability issues of finance reserve charge-backs and warranty policy charge-backs.
- Avoid the after-sale continuing accounting costs of maintaining records, collecting receivables, paying payables, and liquidating the remaining assets.
- If the corporation has tax net operating loss carry-overs, the buyer may be able to use them to offset future profits under certain circumstances.
All of these issues are important. Each can save significant amounts of money in either taxes or aftersale costs of liquidation. The after-sale cost of liquidation alone can be extremely expensive and can take several years to complete.
Some of the disadvantages are:
- Non-traditional. May be more difficult to negotiate.
- Does not allow an “asset basis” adjustment to the buyer for depreciation purposes.
- Will usually require the seller to give warranties and representations of indemnity for prior corporate acts to the buyer.
The items of advantage and disadvantage are by no means all inclusive. Each dealership has different facts and each issue will not have the same degree of importance in a sell decision. To be properly informed you should give each issue consideration as to the impact it may have on your net realized sale.
If you are thinking about selling your dealership, I suggest you explore the possibility of a corporate stock sale.
Regardless of the method of sale, I urge you to review your options and consult your attorney and C.P.A. before beginning any negotiation with a prospective buyer.
This article was written in 1995.