Q: I want to sell my agency, but there is a big stumbling block. The agency has group and incentive contracts that I obtained very recently after years of effort. I don't want to rock the boat by telling the corporate clients that I sold right after we landed the accounts. If I sell the agency's assets, the clients would have to consent to a formal assignment of their contracts to the buyer, and that's what I want to avoid. I know that I could sell my corporate stock instead of the agency's assets, but the buyer does not want to buy the stock. Two questions: How can I structure the sale, and can I keep the sale secret for a year or so?A:
First, don't take for granted that you won't need clients' consent to a stock sale. There are many contracts that expressly state that you must obtain consent to any kind of change of control by way of asset sale, stock sale or even a merger.
For example, a contract in my files not only requires consent to a sale of assets but also to any change of control, which the client defines as "an event in which any person or entity becomes the beneficial owner, directly or indirectly, of securities representing fifty percent (50%) or more of the total voting power represented by the then outstanding securities." So, a sale of stock would be covered by this kind of clause.
On the other hand, it is true that most contracts for sale of services do not have such comprehensive clauses. For example, another contract in my files states, "Vendor may not, in whole or in part, assign its interests and/or obligations under this Agreement, to any person, firm, partnership, corporation or other entity without the prior written consent of [Client], which consent may be withheld in its sole discretion, and any attempt to the contrary shall be void."
With the latter kinds of clauses, the client's consent is not needed for a stock sale, as the contract stays in place when your stock is sold. Legally, you don't even need to tell the client about what you have done, although you are obviously taking a risk if the client finds out from a third party and is upset because you kept silent.
Prospective buyers usually prefer asset sales for a few reasons. Most important, with an asset sale, the buyer gets to depreciate the assets at their fair market value at the time of the sale. In other words, the buyer gets to deduct the purchase price from its income over a period of years.
Stock purchasers generally cannot depreciate stock that they buy, any more than you can depreciate stock that you buy on a stock exchange. However, if your agency is an S corporation, there is an exception that allows your buyer to treat the stock purchase as an asset purchase for federal income tax purposes.
The exception is called a Section 333(h)(10) election, and at least one of the biggest buyers of travel agencies uses it today. Under that rule, the buyer and seller file a form with the IRS within nine and a half months after the sale, and then the buyer can treat the acquisition as though he had purchased your assets, i.e., the buyer can depreciate the purchase price.
I recommend that you point out this option to your buyer, and then tell him to consult a knowledgeable attorney or accountant for further advice. You should do the same to make sure that your interests are fully protected.