The transfer of an online business

This article was published Dec. 14, 2021, in Twinkle Magazine.

When selling an online store, you inevitably run into the question of how best to transfer your business. Legally, there are really only two different options for this. These options have their own tax, economic and legal consequences. In this article we will elaborate both options for you.

The method of transfer

Legally, there are two ways of transferring a business: the asset transaction and the share/equity transaction. In the case of a sole proprietorship or a partnership (VOF), there are no shares and the asset transaction is the only way to transfer your business. In the case of a Limited Liability Company (B.V.) there is the option of transferring your business by means of an asset transaction or an equity transaction.

The asset transaction

An asset transaction involves the buyer acquiring only possessions (called "assets" including "goodwill") from the seller. If debts are also taken over, you speak of an asset/liability transaction. From here on, we will assume the usual asset transaction: so Company X sells possessions (assets) of the company to a third party, who can use them to continue operations. These are assets that are on the balance sheet of the company (inventory, inventory and possibly the online business), but also all peripheral items that the buyer needs to continue the business (think of supplier contacts, customer base, domain name, brand name) whose added value can be classified as 'goodwill'. Items such as bank balances and debtors/creditors are generally retained by the selling party.

The equity transaction

With a share transaction, a private person or another company (usually also a private limited company: the Holding B.V.) sells the shares in Ecommerce B.V. A buyer then takes over the entire B.V. including assets and liabilities, rights and obligations, agreements with customers and suppliers, licenses, permits and obligations to the tax authorities in a single transaction. Nothing else changes: only the owner of the shares in Ecommerce B.V. changes.

The advantages and disadvantages of both transactions

Choosing to make a stock or asset transaction can have a lot of impact. If you have the choice (in the case of a Limited Liability Company (B.V.)) carefully study the issues below before embarking on a path. If you have no choice (Sole Proprietorship or VOF) then balance the pros and cons below. Perhaps then you will look differently at the planned sale or at the asking price!

Legal implications of asset transaction

In the case of an asset transaction, it is essential to write down in great detail exactly what is being acquired. Items not included are not within the scope of the acquisition. Make a complete list, and in the case of an online business, think at least:

• Domain name and any additional registrations,
• Hosting, or the agreement with the hosted online business software provider,
• Payment provider,
• Product suppliers,
• Intellectual property rights,
• Inventory (including description and quantities),
• Full inventory list, all sales accounts (Amazon, Bol.com, etc),
• Social media accounts and all other accounts,
• Logins
• All agreements with other third parties (SEO, content, photos etc).

An advantage of an asset transaction is that it is easier to leave items with the selling party ("cherry picking"). Think of (expensive) assets that the buyer does not need and that make the price unnecessarily high (for example, real estate, land or investments in other companies).

In addition, buyers in an asset transaction should be aware that agreements with suppliers and buyers will have to be re-contracted and this regularly forms the basis for a (re)negotiation with these parties. So don't take existing discount structures and payment terms for granted.

A big advantage for buyers is that with an asset transaction you basically do not take over any risks from the past. This is in contrast to taking over a B.V., where the risk of the proverbial "body in the closet" is much greater. Think of claims for guarantees, tax assessments, labor disputes and impending (legal) proceedings. So in that sense, an asset transaction is less risky than a share transaction.

Legal implications equity transaction

The need for a detailed description of all matters to be acquired is less with a share transaction: after all, with the acquisition of the shares, all rights and obligations of the company are also immediately transferred.

The same also applies to all (contracted) relations of the company: in most cases these too are transferred 1 on 1 (pay attention to 'change of control' clauses).

There is therefore a downside to these advantages, because with the duties taken over, the risk of acquired problems is higher.

Tax implications of asset transaction

For the seller, there are tax disadvantages associated with the asset transaction: namely, the tax authorities will want to settle with the seller on the profit he or she makes from the transaction (this profit is formed by the difference between the book value of the assets and the actual proceeds from the business sale). And that can add up: corporate tax in 2022 is 15.0% up to €395,000 and 25.8% above that. So on a book profit of €800,000, you pay €163,740 in tax. A major setback if you did not count on this when agreeing on the price.

The buyer, on the other hand, gets all the acquired assets on his balance sheet, including the goodwill (the difference between the purchase price and the value of the acquired assets). The buyer can amortize this goodwill, which provides a tax advantage: since 2007, goodwill must be amortized over 10 years at 10% per year. In other words, these 10 years, 10% of the goodwill can be entered as an expense each year. The profit in those years falls accordingly and so does the tax burden for the company.

Therefore, if in an acquisition there is a choice between an asset transaction and an equity transaction, due to these tax advantages and disadvantages, you can expect to pay slightly more for the same company in the asset transaction.

Tax implications equity transaction

If the seller has a holding company, then a share transaction is beneficial. This is because, thanks to participation exemption, the profit the seller makes on the sale is not subject to corporate income tax. As the above example shows, this can save €163,740 on a book profit of €800,000.

For a buyer, a share transaction puts the entire company on his balance sheet (if he is not a private person) and goodwill cannot be amortized. For buyers, this is therefore a tax disadvantage compared to the asset transaction.
Note: sellers without a private limited company sometimes think they can take advantage of the benefits of the participation exemption by quickly setting up a private limited company before selling the company. But the Tax Authorities see through this and will quickly draw the conclusion that this B.V. was only established in order to take advantage of the tax benefit. Therefore, the Tax Office uses a 3-year time limit for this arrangement (in other words, the business must have been operated in the transferred B.V. for at least 3 years). To make sure you're in the right place, consider asking the tax inspector for a ruling in these cases before executing the transaction.

Other consequences of a business transfer

Contrary to what is often assumed, even in the case of an asset transaction, employees in principle go with the buyer. Even in the case of an asset transaction, the legal "Transfer of Undertaking" applies: if the identity of the company is preserved, a transfer of undertaking is assumed, and the rights of the employees are preserved (as much as possible) when they go with the company to the new owner. For its part, the new owner of the enterprise also receives the rights vis-à-vis the employees of the previous owner.

In conclusion, it is worth remembering that a share transaction can only be carried out by a notary and, of course, there are costs involved. An asset transaction does not require a trip to the notary.

Conclusion

Many online business owners still do business in a sole proprietorship or partnership. This is the easiest way to start up and offers tax advantages in the beginning. As this article shows, those advantages are largely gone with a business sale. Should you be considering offering your online business for sale in the next few years, be sure to check out the options that a Limited Liability Company offers you. Every online business is different, so get advice from a bookkeeper or accountant.