What is Blue Sky?
Structuring a Transaction with
Little to No Hard Assets
The term "blue sky" comes up often when referring to selling a business — What does it mean?
Blue sky and goodwill are often used interchangeably. They refer to intangibles, whether this is via reputation, processes, procedures, etc. Examples include a software system, large contracts the business won but then turned down due
to timing or capacity, brand equity, customer lists, intellectual property or another revenue line that has started but is not yet showing profit on the company's prior year's tax returns.
How is a purchase structured that involves blue sky?
There are several ways to go about buying a company with blue sky. This can mean proving the perceived value to a bank through a structured business plan, or an earn out where the seller is paid for that portion of the business based upon how the company performs after acquisition. Of course, an un-financed transaction — commonly referred to as an all cash deal — can have as little
or as much blue sky as the buyer is willing to pay.
What is an example of a purchase structrure?
Largely, the purchase of a business will be allocated into different "buckets" by the attorneys and CPAs involved. These allocations are very important as there are large variations in tax strategy. For instance, a business could be broken
down as follows:
Anything tangible related to the business, such as computers, dump trucks, printing presses, lab equipment, or similar.
The sellable merchandise a business keeps on hand. For business such as plumbing companies or electrical contractors, their inventory is the parts they keep on hand to service their customers. This would include conduit, pipes, wire nuts, etc.
A portion of the business is allocated to the non-compete or non-competition agreement as persuant to the negotiated agreement between both parties that the exiting seller will not impact the business.
More often than not, the seller agrees to assist the new owner for a pre-determined period of time, anything from two weeks to five years, depending on the type and size of business.
This refers to the financially justifiable portion of the purchase based on the company's processes and procedures, name recognition, recurring clientele, et al.