Published on January 27, 2021
The sale of a business is often the most significant financial event an owner faces during his or her lifetime.
Many times, however, the owner begins negotiating the sale without understanding how critical tax aspects of the deal structure can have a huge effect on the net amount of money they’ll receive.
Understanding key factors about your business will result in you being able to negotiate the best deal for you, or at least understand the implications of a deal.
Recently I was asked for advice about a business that was for sale. The company was working with its advisors on restructuring the way various locations were owned in order to better position the company for a sale in three to five years. After reviewing the proposed transaction for this $5 million company, I discovered that the shareholders would have unknowingly generated a tax bill of $2 million on the restructuring of the company. Moreover, they would been hit with a $1 million tax liability as individuals.
In this case, the taxes would have been due, but no cash was being generated to pay them.
Fortunately, the owner was planning far enough ahead for the sale of his business, and we were able to put some things into place to ensure that more money stayed in the owner’s pocket after the sale. Crisis averted!
Planning for the ownership and structure will hopefully minimize the eventual taxes on the sale, or at least defer the taxes until the business is sold.
In this case, the business owner would never have gone forward with the plan as structured if she had fully understood its negative tax impact.
Let’s review four critical issues to be considered when structuring the sale of a business.
This question is the most important starting point in determining the tax consequences of a sale.
If you are selling the capital ownership of a business, here are a few things to know:
If you are selling assets, you are left with the most complex issues to deal with tax-wise. This is the structure that most buyers want.
In the sale of a business, the allocation of purchase price is a key factor in determining tax implications. Take a look at the types of assets normally included in the allocation of the purchase price, and the tax impact of each:
Consider the tax implications of alternative forms of payment.
Avoiding double taxes is one of the most significant issues facing a sale of a regular C corporation or an S corporation subject to the built-in gains tax rules.
You can use several planning techniques to reduce the double taxes.
Planning for the sale of your business should begin not when you enter into negotiations to sell, but when you form the company.
Even then, your structure should be regularly reviewed over the life of the company. Although you are, in reality, mostly stuck in the tax structure that was chosen for the business, there are many opportunities to minimize the tax consequences of a sale, for even the worst business tax structures.
But remember, the buyer does not have the same objectives as you do, and an understanding of the buyer’s goals along with the available tax minimization strategies is critically important to get the desired result when selling your business.
And of course, this does not even address the most important issues of negotiating a sales price and related payment terms.
Not sure where to start with exit planning? Our Business Exit Planning Checklist can help.
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Editor's note: this article was originally published in 2014. It was updated with new information in 2021.
Published on January 27, 2021