There are many things to consider when preparing to sell a business. Some of the items are strategic business considerations, financial considerations or family considerations. However, an area that is often overlooked or thought to have an insignificant impact when selling a company is tax considerations.
Tax considerations can have a significant impact, depending on the ownership and/or entity structure, makeup of the business and structure of the deal. The following are a few tax-related areas to consider when preparing to sell a business.
The first item to consider is deal structure regarding the sale of the assets of the company or the stock. Often, a willing buyer will want to purchase the assets of the business to expedite the payback from a tax cost recovery standpoint. This may be counter to a seller’s goals and can possibly result in a higher tax liability. We frequently work with our clients to compare the tax cost of an asset sale vs. stock sale. This analysis can provide a seller the opportunity to negotiate a higher selling price.
In transactions structured as an asset sale, we also work with sellers to determine the optimal purchase price allocation related to the various classes of assets sold for tax purposes. This is an area that can have a significant tax impact and is often overlooked or otherwise addressed post-closing of the transaction. It is also critically important that this be negotiated prior to closing and narrowly defined in the asset purchase agreement.
The last area that can be critically important to the transaction is tax due diligence. This often can significantly impact deals for businesses operating in numerous states. We typically see issues arise relative to state tax filing positions or lack thereof regarding income, franchise or sales and use tax exposure. The recent Wayfair v. South Dakota case law has also increased the overall exposure related to state tax nexus (requirement to file in a specific state). It is important to evaluate these areas prior to entering into negotiations with a potential buyer to determine the impact or amount of exposure that may exist and develop a plan to address these issues prior to a sale event.
If you are considering a potential sale of your company, contact your Schneider Downs Succession Planning advisor to start a conversation regarding these matters.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.