Succession planning can be a difficult process with both financial and nonfinancial considerations. A CFM must plan for what is actually being sold, the related psychological effects on the buyer and seller, management’s retirement needs, and adequate cash flow for the company’s continued success, to name a few.

Further, there are distinct tax differences based not only on the type of transaction, but also on how it relates to the buyer and seller sides of the sale. These considerable differences require the CFM to understand the basic tax effects of various succession plans to properly quantify the net proceeds available to all parties.

This article will discuss the advantages and disadvantages of four common succession planning techniques: asset and stock sales, tax-free reorganizations, gifting, and employee stock ownership plans (ESOPs).

Asset & Stock Sales

The structure of the sale is often driven by each party’s bargaining power, which can affect both the type and price of the transaction. As a general rule, sellers prefer to sell the company’s stock and buyers prefer to purchase assets.

Following are some of the basic differences between the two structures. (Due to the limited scope of this article, only regular C corporations and subchapter S corporations will be discussed.)

Asset Sale

In an asset sale, the seller of a C corporation generally faces double taxation. First, the corporation is taxed on the sale of its assets to the buyer; then, the stockholders are taxed again when the proceeds are distributed.