Tax Article - Buying or Selling A Business

Fundamental Guidelines

Target Audience: Business Owners, Financial Managers, Financial Buyers, Strategic Buyers, M&A Consultants, Attorneys, Bankers, Intermediaries, M&A Tax Services

At one time or another, just about every business owner considers either buying another company or selling his or her own. Email an Accountant or call us at (888) 875-9770 to discuss.

Establish your Intentions when Buying or Selling

You might be surprised to learn how many business owners leap headlong into sale negotiations without taking the time to clearly establish their intentions.

If you’re a buyer, identify your goals and your tactics for achieving them. Typically, buyers can be divided into two main categories: financial (show me the money!) and strategic (show me the synergy!).

For example, what’s the most you’re willing to pay? A financial buyer is typically more focused on this threshold, as only dollars and cents are at stake. On the other hand, a strategic buyer might be more flexible, as the eventual benefits of the merger can be more important than the immediate cost.

Sellers should pose similar questions: What’s the lowest offer you’ll accept? Are you in a hurry to sell? What conditions will you require as part of the sale? Also be prepared to speak confidently about your business’s strengths and address any perceived weaknesses.

Research your Purchase, Due Diligence as a Seller

Of course, you also must get to know the party you’ll be dealing with. As a buyer, for instance, you should have a thorough understanding of the business — gained through extensive due diligence. You’ll probably be better off if you get professional help conducting this research.

From a seller’s standpoint, due diligence is also important. You need to know that your buyer can afford to purchase the business and, if the deal will be seller-financed, how well the company will be run while the note is being paid off.

It’s also helpful to learn if your buyer has looked at many other businesses. Buyers who know they have other options if your deal falls through will probably drive a harder bargain.

Look Beyond Price to Deal Structure

In an M&A transaction, focusing on price is more than understandable. But selling a business is a complicated process, and agreeing on price is only one component. When entering the negotiation stage, keep in mind other items such as the down payment amount, the interest rate on any loans involved, collateral, seller warranties, earnout provisions, buyer guarantees, non compete agreements and consulting agreements.

Another key factor is the deal’s structure. Is the company’s stock being acquired or just its assets? Generally, sellers typically prefer a stock sale to qualify for capital gains treatment. Buyers, on the other hand, generally prefer an asset transaction, which provides better cash flow after the deal because of significant tax benefits such as upward revaluation of assets and increased depreciation.

As you consider these various factors, don’t become overly resolute on any one. Remain flexible and be willing to perhaps compromise on some elements to get the ones that are most important to you, such as those related to financing terms, the closing date, employee retention or seller warranties.

Taxes: Is the Sale Taxable? Any Future Tax Deductions in the Purchase?

Another key point to remember is taxes. Transferring a business may be accomplished as either a taxable sale or a nontaxable or tax-deferred transaction.

Generally, business owners try to avoid — or postpone — the tax hit to maintain cash flow. Tax-deferred transactions include corporate or partnership mergers and situations where, in exchange for stock or assets, the seller receives buyer stock or certain qualifying property.

Then again, there are some advantages to a taxable sale. In such arrangements, the seller usually gets cash, which eliminates worries about collecting a note or the quality of buyer stock. The buyer, meanwhile, gets a stepped-up basis in the assets and doesn’t have to contend with the seller as a continuing equity owner. Moreover, neither party need worry about the technical requirements involved with a tax-free or tax-deferred transaction.

For buyers -- buying assets rather than stock could yield greater, future tax deductions. For sellers -- selling stock is likely more tax efficient, thought it is likely that the buyer will prefer assets.

Get the Best Possible Deal: Think Small

As you can see, acquiring another company or selling your current one entails many, many details. That’s why it’s best to “think small” — consider all of the little things before you leap into negotiations. By planning carefully and negotiating wisely, you’ll give yourself a better chance to get the best deal possible.

Professionals Needed to Help Buyers and Sellers

Business sales are rarely one-on-one transactions. A wide variety of professionals typically help buyers and sellers complete the deal. These include:

Accountants

CPAs are skilled in preparing and interpreting financial statements for a variety of purposes, including business analysis and valuation, and can draw up adjusted income statements and balance sheets. These financial statements help prospective buyers estimate how much of a return they could expect if they operated a business using their own methods.

Attorneys

Although your attorney may be able to provide M&A advice, lawyers who specialize in corporate transactions are recommended for negotiating and contractually documenting the best terms for a business sale. Generally, these specialists are knowledgeable about securities law, corporate finance, taxation, real estate and estate planning.

Bankers

A personal banker familiar with your company and the business community can be a useful source of information and may be able to recommend an M&A consultant. Whether you’re a buyer or seller, it’s important to keep your banker updated on your plans and progress.

Intermediaries

Several types of professionals specialize in introducing buyers and sellers and negotiating transactions. Business brokers are most commonly hired by small businesses when a straightforward sale of a company’s stock and assets is involved. Investment bankers are usually capable of handling all aspects of an M&A deal, too.

As shown, buying and selling a business requires an inordinate amount of work and analysis to achieve the best result. Seeking competent professional advice is a must. Please contact Feeley & Driscoll, please Email us or call us at 1 (888) 875-9770.