Tax considerations when selling your business

When selling a business, most business owners are curious as to how much cash they would walk away with. More specifically, what tax impact would they incur and what would be the best structure and allocation to minimize the tax impact? 

How would one get the answer to all these questions? Through something called a tax minimization analysis (TMA). As a business owner, this is your one-stop shop for all the above. A TMA will analyze multiple factors that play a vital role in the outcome of selling a retail or service business. 

A TMA, when executed properly, allows sellers to see the full financial breakdown on every level of mergers, acquisitions and even business succession. Along with this, a TMA is a waterfall of the entire transaction to provide sellers with an accurate calculation that considers all transaction factors that may affect the amount of cash available at closing and post-closing. In short, a TMA revolutionizes merger and acquisition (M&A) transactions as sellers are granted the transparency they deserve and receive the information necessary to best advocate for the best desired outcome. 

An M&A transaction is often an overwhelming process. They have a multitude of variables that could drastically influence the outcome. These variables include—but are certainly not limited to—the overall structure of the transaction, the asset/stock basis of the selling company, ownership configurations, real estate involvement, multiple entity involvement, liabilities paid at closing, purchase price adjustments, earn-outs, consulting fees, recaptured depreciation and the federal, state and local tax impact. The sooner that all variables in the transaction are understood, the better suited your counsel will be to understand how to best combat or strategically fully use such variables possible. This is to ensure that you did not invest your life into a business to give 30%-50% away in taxes when sold. 

While a TMA typically pays for itself through the minimization of tax savings, there is also a possibility that the findings in a TMA could pay for the M&A team that you engage for the transaction. For example, let us say your business deals with complex licensing or regulation and the buyer is looking to pursue an asset sale for the benefits of immediate depreciation. With a TMA, your counsel would be able to analyze and determine which structure would best apply to this transaction, whether it be an asset, stock or, in this case, a potential 338(h)(10) sale. Using a TMA, you can calculate the tax effect of each sale type (asset, stock, and 338(h)10 to determine what structure would be the most beneficial from a tax standpoint. Under this example, the TMA may determine that the 338(h)10 will best overcome the complexities of assigning licenses or permits while also providing the paramount tax outcome for the seller and possibly the buyer. 

A TMA is used to identify several factors as the transaction progresses to give the business owner full insight and transparency. A successful TMA allows the client and counsel to engage in an open dialogue regarding goals and pursue the best possible transaction structure.

Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. Ian Perry, staff accountant with the firm, co-authored the article.