Selling Your Business ? Deal Structure and Taxes | Finance ...

The purpose of this article

is to demons trate the importance of the tax impact in the sale of your business. As an M & A intermediary and member of the IBBA, International Business Brokers Association, we recognize our responsibility to recommend that our clients use attorneys and tax accountants for independent advice on transactions.

As a general rule, buyers of businesses have already completed several transactions. They have a process and are surrounded by a team of experienced mergers and acquisitions professionals. Sellers on the other hand, sell a business only one time. Their ?team? Consists of their outside counsel who does general business law and their accountant who does their books and tax filings. It is important to note that the seller?s team may have little or no experience in a business sale transaction. Another general rule is that a deal structure that favors a buyer from the tax perspective normally is detrimental to the seller?s tax situation and vice versa. For example, in allocating the purchase price in the sale of asset, the buyer wants the fastest write-off possible. From a tax standpoint he would want to allocate as much of the transaction value to a consulting contract for the seller and equipment with a short depreciation period. A consulting contract is taxed to the seller as earned income, generated rally the highest possible tax rate. The difference between the depreciated tax basis of equipment and the amount of the purchase price allocated is taxed to the seller at the seller?s ordinary income tax rate. This is the second highest gene rally tax rate (no FICA due on this vs.. Earned income). The seller would prefer to have more of the purchase price allocated to goodwill, personal goodwill, and going concern value. The seller would be taxed at the individual capital gains rates more for luxurious for gains in these categories. An individual that was in the 40% income tax bracket would pay capital gains at a rate of 20%. Rating:. Bracket on asset sale of a business will normally put a seller into the highest income tax

The buyer?s write-off period for goodwill, personal goodwill, and going concern value is fifteen years. This is far less desirable than the one or two years of expense ?write-off? for a consulting agreement sale.

Another very important issue for tax purposes is Whether the sale is a stock sale or asset at. Buyers prefer asset sales generated rally and sellers gene rally prefer stock sales. In an asset sale the buyer gets to take a step-up in basis for machinery and equipment. Let?s say that the seller?s depreciated value for the machinery and equipment were $ 600,000. FMV and purchase price allocation were $ Million 1.25. Under a stock sale the buyer inherits the historical depreciation structure for write-off. In an asset sale the buyer Establishes the $ 1.25 million (stepped up value) as his basis for depreciation and gets the advantage of bigger write-offs for tax purposes. The seller prefers a stock sale because the entire gain is taxed at the more for luxurious long-term capital gains rate. For an asset sale a portion of the gains will be taxed at the less income tax rates for luxurious. In the example above, the seller?s tax liability for the machinery and equipment Gain on asset sale would be in 40% of the $ 625,000 gain or $ 250,000. In a stock sale the tax liability for the same gain associated with the machinery and equipment is 20% of $ 625,000, or $ 125,000. The shape of the seller?s organization, for example C Corp, S Corp, or LLC are important to consider in a business sale. In a C Corp vs. to S Corp and LLC, the gains are subject to double taxation. Rate in a C Corp sale the gain from the sale of assets is taxed at the corporate income tax. The remaining proceeds are distributed to the shareholders and the difference between the liquidation proceeds and the stockholder stock basis are taxed at the individual?s long-term capital gains rate. The gains have been taxed twice reducing the individual?s after- tax proceeds. 1: tax consideration checklist ? To S Corp or LLC sale results in gains being taxed only once using the tax profile of the individual stockholder

Selling your business. Get good tax and legal counsel when you Establish the initial form of your business ? C Corp, S Corp, or LLC, etc.

2 If you Establish a C Corp, retain ownership of all appreciating assets outside of the corporation (land and buildings, patents, trademarks, franchise rights). Note: a C Corp sale in there, are no long-term capital gains tax rates only income tax rates. Long-term capital gains can only offset long-term capital losses. Personal assets sales can have for luxurious long-term capital gains treatment and you avoid double taxation for these assets with big gains.

3rd Look first at the economics of the sales transaction and secondly at the tax structure. 4th Make sure your professional support team has deal making experience. 5th Before you take your business to the market, work with your professionals to understand your tax characteristics and how various deal structures will impact the after-tax sale proceeds

6th Before you complete your sales transaction work with a financial planning or tax planning professional to deter mine if there are strategies you can employ to defer or eliminate the payment of taxes.

7th Recognize that as a general rule your desire to ?cash out? and receive all proceeds from your sale immediately will increase your tax liability. 8th Get your professionals involved early and keep them involved in analyzing various bids to deter mine your best offer. Again, the purpose of this article was not to offer you tax advice (which I am not qualified to do). It was to alert you to the huge potential impact that the deal structure and taxes can have on the economics of your sales transaction and the importance of involving the right legal and tax professionals. id=?article-resource?> Dave Kauppi is the editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and Managing Partner of MidMarket Capital , Providing business broker and investment banking services to owners of middle market companies. The firm counsels clients in the areas of M & A and divestiture, succession planning family business, valuations, ?Smart Equity Capital Raises?, business sales and business acquisition. Dave graduated from The Wharton School of Business, holds a Series 63 and is a registered business broker. Visit our Web site to review our lists of buyers and sellers. Learn about maximizing your selling price, Minimizing taxes, negotiating tactics, letters of intent, how to select an advisor, and much more. The Exit Strategist

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