Construction Company Stock Sale to Contractor License & Contracts

Construction Company Stock Sale to Contractor License & Contracts

Overview of Situation

This 30+ year-old construction company had excellent sales and profitability which resulted in a very favorable valuation. The company had government contracts with cities and counties that were critical to preserve in a sale. An Asset Sale would create a new corporate entity, with a new EIN, and a new contractor license number (contrator licenses are assigned to the corporate entity and cannot be transferred to a different entity). Thus, with an Asset Sale, the government contracts would have to be assigned to the new corporate entity and new contractor license number. This could have put some contracts at risk during the transition.

Approach & Solution

While Asset Sales are the most common transaction form for small business sales, it was not a viable option for this transaction. As the Business Brokers representing the Seller, Pacific Business Sales structured the transaction as a Stock Sale. In the Stock Sale the Buyer would acquire the stock of the corporation, leaving the corporate entity intact. The EIN and contractor license numbers would remain the same and ongoing contracts would not be affected.

While the Stock Sale solved the problems of preserving contracts and the contractor license number, it created a tax problem for the Buyer, namely the loss of depreciation. Our tax strategy CPA partner worked with the Buyer and Seller to implement IRS 338(h) allows a corporation acquiring another corporation to treat the assets as if they were acquired in an Asset Sale. This allowed the Buyer to step up the depreciation of the assets to full market value and amortize the goodwill as well, providing an enormous tax benefit and solving the problem with the stock sale.

Results & Conclusion

This transaction was closed with Pacific Business Sales procuring the Buyer and representing both Buyer and Seller as a dual agent. SBA financing was provided by one of Pacific Business Sales SBA Preferred Lending Program (PLP Lenders) with a 10% buyer down payment, 10% seller note, and 80% SBA financing. The transaction was structured as a Stock Sale with the Buyer implementing IRS 338(h) along with other tax strategies recommended by our tax strategy CPA partner.