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SELL A BUSINESS - DEAL STRUCTURE AND TAXES
by
Dave Kauppi
The purpose of this article is to demonstrate 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. |
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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 sellers 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 sellers tax situation and vice versa.
For example, in allocating the purchase price in an
asset sale, 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, generally 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
sellers ordinary income tax rate. This is generally the
second highest 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 more favorable individual capital gains rates for
gains in these categories. An individual that was in the
40% income tax bracket would pay capital gains at a 20%
rate. Note: an asset sale of a business will normally
put a seller into the highest income tax bracket.
The buyers 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.
Another very important issue for tax purposes is whether
the sale is a stock sale or an asset sale. Buyers
generally prefer asset sales and sellers generally
prefer stock sales. In an asset sale the buyer gets to
take a step-up in basis for machinery and equipment.
Lets say that the sellers depreciated value for the
machinery and equipment were $600,000. FMV and purchase
price allocation were $1.25 million. 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 favorable long-term capital gains
rate. For an asset sale a portion of the gains will be
taxed at the less favorable income tax rates. In the
example above, the sellers tax liability for the
machinery and equipment gain in an asset sale would be
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 form of the sellers organization, for example C
Corp, S Corp, or LLC are important to consider in a
business sale. In a C Corp vs. an S Corp and LLC, the
gains are subject to double taxation. In a C Corp sale
the gain from the sale of assets is taxed at the
corporate income tax rate. The remaining proceeds are
distributed to the shareholders and the difference
between the liquidation proceeds and the stockholder
stock basis are taxed at the individuals long-term
capital gains rate. The gains have been taxed twice
reducing the individuals after-tax proceeds. An S Corp
or LLC sale results in gains being taxed only once using
the tax profile of the individual stockholder.
Selling your business - tax consideration checklist:
1.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: in a C Corp sale, 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 favorable long-term capital gains
treatment and you avoid double taxation for these assets
with big gains. 3.Look first at the economics of the
sales transaction and secondly at the tax structure.
4.Make sure your professional support team has deal
making experience. 5.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 6.Before you
complete your sales transaction work with a financial
planning or tax planning professional to determine if
there are strategies you can employ to defer or
eliminate the payment of taxes. 7.Recognize that as a
general rule your desire to "cash out" and receive all
proceeds from your sale immediately will increase your
tax liability. 8.Get your professionals involved early
and keep them involved in analyzing various bids to
determine 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.
Dave Kauppi is a Merger and Acquisition Advisor with
Mid Market Capital, Inc. MMC is a business broker firm
specializing in middle market corporate clients. We
provide M&A and divestiture, succession planning,
valuations, corporate growth and turnaround services.
Dave is a Certified Business Intermediary (CBI), a
licensed business broker, and a member of IBBA and the
MBBI. Contact (630) 325-0123, davekauppi@midmarkcap.com
or www.midmarkcap.com. |
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How to
find a Professional Advisor that is right for you?
by Jim
Brown
How to find a Professional Advisor that is right for
you?
The right professional advisor can help you find the
business that you are looking for. Many buyers when
searching for a business for sale turn to their
accountant and attorney for advice. Although your
accountant or attorney may have experience dealing with
various types of business, there are not professionals
in helping you find a business for sale. You should
consult your accountant and attorney before the
purchase, but don't rely on them to find you a business.
Ask them to refer you to a business broker as you will
need one for the following reasons:
A broker will ask you lots of questions and know exactly
what you're looking for. He or she may even be able to
help you decide what kind of business might be best for
you to purchase, given your resources, abilities, and
interests. A business broker matches buyers and sellers.
A broker helps to facilitate the negotiating process.
Since buying a business is at least as emotionally
charged as buying a home, you will benefit greatly from
a third party who can handle all aspects of the
transaction. A broker can speak more candidly to each
party involved in the transaction than they could manage
on their own.
A broker helps to untangle any red tape. An experienced
broker will know the most efficient way to acquire all
the necessary permits and licenses and will know how to
locate financing and a reputable escrow company. This
helps to eliminate many potential risks to you.
Finding a good business broker is not an easy task.
There are many people who call themselves brokers, but
they are in fact real estate sales people who sell real
estate as well as sell businesses in addition to their
real estate activities. If you want specialist help, it
is always best to look for a specialist business broker.
Many are listed in the Yellow Pages and others advertise
businesses for sale in newspapers and on the Internet.
The key is to look for a business broker who has listed
and sold businesses in the industry or industries that
you are interested in.
You need to look for the following in your search for a
business broker that is right for you:
Experience - The broker must be experienced with at
least two or three year's full-time work behind him in
the industry.
Education - A good business broker should have a sound
knowledge of finances and preferably have accounting
qualifications.
Specialize - The broker must specialize in businesses
and not be involved in real estate or commercial
property.
Credentials - The broker must be licensed or approved to
sell businesses under the regulations in your state.
Facilities - The broker should have office facilities
available for meetings and to which you are able to
direct inquiries by telephone when necessary.
Be available - The broker must be available by phone,
even if it is just his mobile, so that you can clear
queries that arise immediately.
Alive - The broker should have sufficient energy to be
able to give the time to help find your business
quickly. In this regard age will come into it because on
the one end a broker that is young will not have the
experience or maturity to handle the assignment
properly, and a broker that is too old will not have the
stamina or the energy to do the job quickly.
Easy to get along with - Your broker must be someone
that you believe you can put your trust in because you
will be working with him or her quite closely in the
future. He or she must have credibility and bring across
to you a sense that you can rely on him or her to secure
a good business at the best price in the shortest amount
of time.
Finding a good business broker is difficult, but you
definitely need one to help you in your business search.
If your accountant or attorney cannot refer you to a
business broker that is "right" for you, ask your banker
or other advisors for a referral. Your family and
friends are also excellent resources.
© 2002-03. GlobalBX. http://www.globalbx.com. All rights
reserved. Buy a Business or Sell a Business on GlobalBX.
GlobalBX is a free business for sale listing exchange
that provides a confidential forum to facilitate the
buying and selling of businesses with thousands of
businesses and franchises for sale as well as
comprehensive business information for business buyers
and business sellers. Lists businesses for sale,
business brokers, and franchise opportunities.
Jim Brown is Director of Marketing at GlobalBX,
www.globalbx.com. Buy a Business or Sell a Business
on GlobalBX, a free business for sale listing exchange
that provides a confidential forum to facilitate the
buying and selling of businesses with thousands of
businesses and franchises for sale as well as
comprehensive business information for business buyers
and business sellers. Lists businesses for sale,
business brokers, and franchise opportunities. |
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How do
you choose the right franchise from the start?
by Jim
Brown
How do you choose the right franchise from the start?
Once you have decided a franchise is the right route for
you, how do you choose the right one? To choose the
franchise that is right for you and that will fulfill
your business dreams, you must know yourself, your
skills, and your dreams and aspirations. You must begin
the process by analyzing yourself. You can start by
investigating into various industries that interest you.
Once you have narrowed down the choices to a few
industries, study your geographical area and determine
if there is a market for that type of business. If so,
follow a research plan and begin contacting the
franchise companies that you believe have potential in
your area. Any reputable franchisor will send you
extensive information about their business at no cost.
After you receive this information, which is usually
disclosed in the offering circular (also known as the
Uniform Franchise Circular Offering or UFOC), you have
to read it carefully. Read between the lines and do your
research. You can go to the library, look online as well
as in professional journals, trade magazines, reference
books, government publications, and annual public
corporation reports. Check with the Federal Trade
Commission (FTC), the state franchise authority, and the
local Better Business Bureau to see if there are any
problems with the company. You can also contact local
chambers of commerce or business development
organizations and see if they can supply information
pertinent to you research. Try to determine if this
company is doing well in terms of its financial health,
management, reputation, and growth prospects.
After you have read the offering circular, ask the
franchisor for a list of franchisees that you can
contact. Current franchisees are a great resource and
can give you detailed insight on how the company is
really doing, what to consider before and after you get
into the business, and other critical information. You
should visit franchise stores and corporate headquarters
to uncover any information that will help you make your
decision. Assemble a team of professional advisors,
including a franchise attorney and an accountant. They
can help you answer technical questions and will be a
useful resource throughout the research process.
© 2002-03. GlobalBX. http://www.globalbx.com. All rights
reserved. Buy a Business or Sell a Business on GlobalBX.
GlobalBX is a free business for sale listing exchange
that provides a confidential forum to facilitate the
buying and selling of businesses with thousands of
businesses and franchises for sale as well as
comprehensive business information for business buyers
and business sellers. Lists businesses for sale,
business brokers, and franchise opportunities.
Jim Brown is Director of Marketing at GlobalBX,
www.globalbx.com. Buy a Business or Sell a Business
on GlobalBX, a free business for sale listing exchange
that provides a confidential forum to facilitate the
buying and selling of businesses with thousands of
businesses and franchises for sale as well as
comprehensive business information for business buyers
and business sellers. Lists businesses for sale,
business brokers, and franchise opportunities. |
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