Most transactions involving sales of entire businesses (100% ownership interests) are set up as asset sales. In an asset sale, the seller retains ownership of his or her business, but transfers specific assets and liabilities – both those recorded on the financial statements / tax returns and those that are not. Asset sales allow buyers two benefits: tax advantages from writing up assets to fair market value and depreciating / amortizing them; and the ability to leave specific liabilities with the seller. They allow sellers to keep specific assets and liabilities as well. By contrast, in a stock sale, the buyer acquires the equity of the seller’s business, and (unless there are other arrangements) thus gets all of the assets and liabilities. The seller receives cash, notes and other consideration from the buyer.
This can cause confusion when we are asked to value businesses that are being sold, because (for example) IBA Market Data are assumed to be asset sales involving operating assets – those necessary to continue operations – and not liabilities. Receivables and cash are generally considered non-operating assets. Sellers are interested not only in the (asset) sale price but also what they will end up with in total: proceeds from the asset sale plus assets and minus liabilities they retain; i.e. the equity in their business after the operating assets are sold. The retained assets and liabilities are sometimes called “packaging adjustments” that allow us to reconcile the asset sale value to the equity value after the operating assets are sold.
I always show this reconciliation in my reports, so that the seller can see what they end up with. If they are going to retain a lot of assets and / or liabilities, the difference between the asset sale value and their equity value can be quite considerable. If you leave out this reconciliation, the seller may easily become confused (and angry) if, for example, the asset sale value is $500,000 and the seller will also retain $500,000 in cash and other assets. They are going to end up with $1,000,000 in equity, and they will wonder where the other $500,000 went!