Tuesday, August 3, 2010

Understand Your Tax Position Before Selling Your Business

You're a business owner who is thinking about selling your business. You've been doing this for many years but it's time to retire, there is a health reason for selling, you're burnt out, it's time to sell this business and move to a bigger and better idea that you have.

So step one is the idea to sell. What should step two be? Step two is to make sure you have something to go to that's better than what you're currently doing.

If you're burnt out and are thinking of selling but you go to all the trouble to find a buyer of the business, get their offer and all of a sudden realize you'd sooner continue what you're doing rather than sit on a beach or play golf 4 days a week or whatever. So step two is to make sure you are excited about what you're going to move to.

If selling seems the best option, step three is to get a business valuation from an independent third party. I can't tell you how many business owners call me and explain why they think their business is worth a certain amount of money. After asking a series of questions I have the problem of bursting their bubble.

So if you are serious about selling, get a third party valuation. The valuation can be an opinion of value from a business broker, accountant or other professional. It doesn't require an in depth appraisal where the matter may go to a court such as for a divorce or partnership dispute.

The fourth step is to talk to your tax agent or hire a professional that can let you know how much you will get to keep once the buyer pays your negotiated purchase price.

Just because the buyer offers you $1,000,000 for your business it doesn't mean that's what you get to keep. There is an issue called taxes that needs to be dealt with and it can get complicated.

There are many ways it can get complicated. Complication one starts with the legal entity of the business. Tax write offs and tax minimization are different for a Sole Proprietor or an LLC or an S Corp and especially a C Corp.

Complication two comes into play as the buyer wants to maximize the tax benefits from his perspective which often have a negative consequence to the seller. This complication has to be resolved for the transaction to close through the Purchase Price Allocation process.

The Purchase Price Allocation comes into play when the total purchase price is broken down into items such as inventory, goodwill, fixtures, furniture and equipment, covenant not to compete, training and other categories available that vary according to the business being sold.

For the benefit of both the buyer and the seller, it is important to recognize that the deal can fall over if agreement is not reached on the Purchase Price Allocation as there are tax consequences to each party.

Furthermore, this piece of negotiation can arise after the first set of negotiations for the purchase price and terms of the deal. If the purchase price and terms have been protracted and tough negotiations, working through the Purchase Price Allocation can open a new source of tension.

The key point here is that there must be willingness for each party to give on the Purchase Price Allocation. If one party refuses to budge then the transaction will most likely die.

By : Andrew_Rogerson

1 comment:

yukon said...

Wonderful, thanks so much for this post! I now have a lot more to discuss with my business broker, hopefully they'll have more recommendations on what to do tax wise. Thanks again!