Business Law Cincinnati: What You Need to Know About Selling Your Business

On Behalf of | Nov 15, 2016 | IRS Dispute |

Business Law Cincinnati: What You Need to Know About Selling Your Business Posted on – 11/15/2016 by PJK When it comes to selling a business, it is not uncommon for the Business Owner to have little or no experience with the ins and outs of how to sell a business. After all, they have been busy running the day-to-day operations and building their business. So, when the time comes to sell their business, a business owner needs to assemble a legal and accounting team that has experience with selling a business. Deal Structure:   Generally, a deal structure that favors the buyer is detrimental to the seller, while a deal structure that favors the seller is detrimental to the buyer.  For example, a very important issue is whether the business sale involves a sale of the stock or equity in the business, or a sale of the business’ assets. Buyers generally prefer asset purchases because it allows them take a step-up in basis for any machinery and equipment they acquire, and it also allows the new owner to distance him or herself from the current businesses’ prior liabilities and risks.  The asset purchases agreement will allow the new owner to start with a clean slate.    On the other hand, the business owner prefers a stock sale because of the tax benefits.  With a stock sale, the entire gain will be taxed at the more favorable long-term capital gains rate. While the proceeds from an asset sale will be taxed at the less favorable ordinary income tax rates. The deal structure can ultimately impact the sale price of the business.  In some situations, the business owner may be willing to sell the business at a discount, in exchange for the buyer agreeing to a stock sale, or the buyer may be willing to pay a premium to encourage the business owner to agree to an asset sale.  As in most business situations, everything is negotiable, including the allocation of the purchase price. Allocation of Purchase Price: Another important issue when selling a business is allocating the purchase price. When the buyer and seller allocate the purchase price in an asset sale, the buyer wants the fastest write-off possible, while the seller wants to be taxed at the lowest possible rate. The Buyer wants to allocate as much of the transaction value to current expenses, such as consulting fees, and to equipment with a short depreciation period.  The problem is, consulting fees are taxed at higher ordinary income rates to the seller.  The seller would prefer more of the purchase to be allocated to goodwill, personal goodwill, and going concern value, which are taxed at the more favorable individual capital gains rates, which results in the buyer depreciating these costs over a longer time period. The Business Organization: The type of business organization the Seller uses to operate his business is also an important consideration in a business sale. Most small and medium sized businesses are established as either S-Corporations or LLCs.  These types of businesses allow the proceeds from an asset sale to “pass through” the business entity, with no taxation at the business level, so the proceeds are only taxed to the business owner.  However, with a C-Corporation the gains are subject to double taxation. In a C-Corporation the gain from the sale of assets is taxed at the corporate income tax rate. Then, after the corporate taxes have been paid, the remaining proceeds are distributed to the shareholders. The difference between the liquidation proceeds and the stockholder’s basis are taxed at the individual’s long-term capital gains rate. Thus, the proceeds from the business sale have been taxed twice, reducing what the business owner ultimately receives. When it comes to selling a business, it is important for the business owner to consider a wide variety of issues, including the deal structure, allocation of the purchase price, and ultimately what he or she will net out of the sale. By doing this they can maximize the financial return on their years of hard work. Paul Kellogg is an attorney in Cincinnati with the Phillips Law Firm, Inc. Paul’s practice focuses on providing comprehensive estate planning and probate services to families and business owners, as well as serving as outside general counsel to entrepreneurs and businesses by providing guidance and advice on a wide variety of transactions and disputes.  He can be reached at (513) 985-2500 or via email at [email protected].   Please explore Paul’s other articles on estate planning and business on the Phillips Law Firm Blog page.     For an initial consultation contact us at (513) 985-2500 or email us at [email protected] or click Chat Now!® to get started immediately.