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As we speak about selling a company, we read many a number of pieces on topics like benefits to both the parties, requisites that are needed to be met before getting into the transaction, and many more. If we talk about a collective secondary research about M&A transactions, we will find that every other piece we look at is a subtle integration in the broader idea. Keeping the essence of this statement as a premise to this analogy, letu2019s continue to contribute further to the idea of selling a business by talking about some important tax considerations involve while you think to Sell a Business.
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Overview • As we speak about selling a company, we read many a number of pieces on topics like benefits to both the parties, requisites that are needed to be met before getting into the transaction, and many more. If we talk about a collective secondary research about M&A transactions, we will find that every other piece we look at is a subtle integration in the broader idea. Keeping the essence of this statement as a premise to this analogy, let’s continue to contribute further to the idea of selling a business by talking about some important tax considerations involve while you think to Sell a Business.
CONSIDER NEGOTIATING EVERYTHING IF SELLING A SOLE PROPRIETERSHIP • When we consider selling a business, we consider all sorts of sellers, from those who are looking for recapitalization to those who want to liquidate their firm. Among all those sellers, there are a few who are looking to sell a sole proprietorship firm. As we all know that in every M&A transaction mostly all the assets fall under capital gains, which eventually is taxed as per favorable tax rates.
Before hiring Business Brokers and starting on with the transaction, the selling party should understand the importance of the fact that allocation of the purchase price for assets like inventory is negotiable from both the parties. Price allocation of all the assets of the business depends on both the parties and their consent to reach to a point where they both get what they hope for. As per an IRS form, the Asset Acquisition Statement made seven classifications to the assets of the business for the ease of price allocation. This includes both capital gains assets like goodwill and other assets like equipments and property. Terms of sales are totally negotiable depending on the class and it can benefit the selling party in the long run as it can minimize the tax cut from the proceeds the seller receives.
USING AN INSTALLMENT SALE • Another consideration to lower the tax impact on the seller’s part is choosing to structure the sales deal as an instalment sale. Using instalment sale and making the first payment after the year of sale, can reduce the tax pinch on the seller’s part but it also guarantees the uncertainty on the buyer’s front regarding the instalment sale reporting of assets and receivables. This uncertainty might put the seller in an unfavorable position but if the buyer is trustworthy this proposition can be beneficial.
SELLING THE FIRM TO THE EMPLOYEES • Ifyou’re on the selling side of the transaction, as all the others, you too need to Value your Business first. This will make you think about the impact of taxes after the transaction is complete. And this note brings us to our next point which indicates the practice where you can choose to sell your business to your employees through employee stock ownership plan or (ESOP). This implies that the seller have stipulated buyers who would agree to pay in cash for any reasonable price the seller might set. The seller can then show the proceeds to defer tax on his gains.
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