Selling Your Business, Taxes & Tax Structures
It is never too early to start thinking about what tax structure you should use when it comes time to sell your business. A simple, but undeniable, rule of life is that taxes matter and they can’t be overlooked. Author Tim Fries at The Tokenist has written an excellent and quite detailed overview article on what tax issues business owners need to consider before selling their business. His article, “What Tax Structure Should You Use When Selling Your Business?” explores many aspects of a topic that many business owners fail to invest enough time in, namely taxes.
As Fries astutely points out, the taxes involving the sale of a business can be complex and are usually unknown to those selling a business for the first time. Your tax structure can influence how much money you receive at the closing of your deal, so it’s a very good idea to pay attention to all aspects of taxation and your business. It is key to remember, “When you are selling your business – as far as taxes are concerned – you’re ultimately selling a collection of assets.”
Fries points out that taxes and selling a business are no small matter. It is possible that up to 50% of the sale of a business can go to taxes. Don’t worry if you are learning this for the first time and feel more than a little shocked. However, this fact does a good job of illuminating the importance of setting up the right tax structure for your business. While you might not be able to get around taxes altogether by investing the time and effort to set up the right structure for your business, you can keep from paying more taxes than is necessary.
There are a lot of variables that go into how much you will ultimately have to pay in taxes. Let’s take a look at some of the key questions Fries raises in his article.
- Is your sale considered ordinary income or is the sale considered capital gains?
- Are you operating as an LLC, a sole proprietorship, a partnership or are you operating as a corporation?
- What portion of the sale price goes to tangible assets as compared to intangible assets?
- Is there a difference between your tax basis and the proceeds from your sale?
- What does your depreciation look like?
- Don’t expect that the buyer will instantly agree to your terms.
- Realize that the decisions you make during negotiations with a buyer will have tax implications.
- Is an installment sale right for your business?
- With C corporations, sellers usually want a stock sale whereas buyers generally prefer an asset sale.
- Cashing out immediately, where you receive all your funds at once, will increase your tax liability.
- Have you considered switching to an S corporation?
- Have you consulted with experts to decide which tax structure is best for you?
- Have you consulted with a business broker?
Selling a business is obviously complicated. Finding a seasoned business broker can help you demystify many aspects of buying and selling a business. Ultimately, having the best deal structure and finding the right buyer can be a labyrinthian process. Having the very best professional help in your corner is simply a must.
Tackling Growth Delusions When Buying a Business
There is no doubt about it, it can be exciting to buy a new business. However, in the process, it is very important that you don’t become unrealistic about future growth. Keep in mind that in the vast majority of cases, if a business is poised to quickly grow substantially, the seller would be far less interested in selling.
Richard Parker’s recent article for Forbes entitled “Don’t Be Delusional About Growth When Buying a Business” seeks to instill a smart degree of caution into prospective buyers. Parker notes that when evaluating a business and talking to the owner, many buyers come away with a sense that enormous growth is just “sitting there” waiting to be seized. In particular, Parker cautions those buyers who are buying into an industry that they know nothing about; those individuals should be very careful.
When buying into an industry where one has no familiarity, there can be a range of problems. The opportunities that you see may not have been tapped into by the existing owner for a range of reasons. You couldn’t possibly guess what these reasons might be without more of a knowledge base. Since you are an outsider, you likely lack the proper perspective and understanding. In turn, this means you may see growth opportunities that may not exist, as the seller may have already tried and failed. Summed up another way, until you actually own the business and are running it on a day to day basis, you simply can’t make a proper assessment of how best to grow that business.
The seductive lure of growth shouldn’t be the determining factor when you are looking for a business. A far more important and ultimately reliable factor is stability. The real question, the foundation of whether or not a business is a good purchase option, is whether or not the business will maintain its revenue and profit levels once you’ve signed on the dotted line and taken over. You want to be sure that the business doesn’t have to grow to remain viable.
As Parker points out, the majority of small business buyers will buy in a sector where they don’t have much experience, and that is fine. What is not fine is assuming that you can greatly grow the business. Of course, if new buyers can achieve that goal, that is great and certainly icing on the cake. But don’t depend on that growth.
In the end, everyone has some ideas that work and some that don’t. You may take over a business and, thanks to having a different perspective than the previous owner, are able to find ways to make that business grow. But realize that many of your ideas for growing the business may fail completely.
A professional business broker will be able to help you determine what business is best for you. A business broker will help keep you focused on what matters most and steer you clear of the mistakes that buyers frequently make when buying a business.
Understanding Corporate Social Responsibility (CSR)
If you don’t exactly understand what corporate social responsibility (CSR) means, don’t worry. We’ll cover the main points you need to know. CSR is increasingly seen as something that companies of all sizes need to be aware of, so let’s take a closer look at a few of the finer points.
There are 4 basic pillars in CSR: the community, the environment, the marketplace and the workplace. The community pillar of CSR refers to your company’s contribution to the local community; this contribution can take a variety of forms ranging from financial support to personal involvement.
The second pillar of CSR is the environment. The simple fact is that people around the world are becoming much more environmentally aware. You can be quite certain that a percentage of your customers and/or clients have environmental concerns.
Increasingly, consumers want to know that the companies that they are purchasing from have good environmental practices. There are many ways that businesses can show that they are environmentally aware. They range from recycling and using low-emission and high-mileage vehicles whenever possible to adopting packaging and containers that are environmentally friendly.
The third pillar of CSR is the marketplace. Proper corporate social responsibility includes the responsible utilization of advertising, public relations, and ethical business conduct. Another key element in the marketplace pillar is adopting fair treatment policies towards suppliers and vendors, contractors and shareholders. In other words, the marketplace aspect of CSR means rejecting exploitative business practices in favor of fairer and more equitable business practices.
The final pillar of CSR concerns the workplace. In the workplace pillar, CSR encourages the implementation of fair and equitable treatment of employees, as well as observing workplace safety protocols and embracing equal opportunity employment and labor standards.
Adopting CSR practices in today’s business climate is a prudent decision, as it serves to increase both shareholder and investor interest, while simultaneously encouraging a company’s value. Likewise, embracing CSR practices can make it easier to attract a buyer and that party may be willing to pay a higher selling price.
Typically, buyers want a business that has many of the attributes supported by the four pillars of CSR. Buyers want businesses that enjoy a high level of customer loyalty and have good overall relations with the local community. Additionally, buyers want businesses that have quality relationships with their suppliers and vendors as well as loyal and dependable employees.
Sellers must realize that buyers want products, goods and services that are in line with the current trends of the marketplace and have an eye towards future trends. Finally, buyers want as little “baggage” as possible. You can be certain that buyers don’t want to find any skeletons lurking about in the company closet. The proper utilization of CSR can address all of these concerns and, in the process, make your business more attractive to a potential buyer.
Understanding M&A Purchasing Agreements
M&A purchasing agreements can have a lot of moving parts. A recent article from Meghan Daniels entitled, “The Makings of the M&A Purchase Agreement” serves to outline a range of facts including that every M&A deal is different. The article, which serves as a general overview, raises a range of good points.
Understanding M&A Purchasing Agreements: Key Elements and Best Practices
Mergers and acquisitions (M&A) are complex transactions that require meticulous planning and execution. One of the most critical components of any M&A deal is the purchasing agreement. This document outlines the terms and conditions of the transaction and serves as a legal contract between the buyer and the seller. In this comprehensive guide, we’ll delve into the essential elements of M&A purchasing agreements and provide best practices to ensure a successful transaction.
What is an M&A Purchasing Agreement?
An M&A purchasing agreement, also known as a purchase and sale agreement (PSA), is a legally binding document that details the terms of the sale of a business or its assets. It covers various aspects of the transaction, including:
- Purchase price and payment terms
- Representations and warranties
- Covenants and conditions
- Indemnification provisions
- Closing procedures
This agreement is crucial for protecting the interests of both parties and ensuring a smooth and transparent transaction process.
Key Elements of an M&A Purchasing Agreement
1. Purchase Price and Payment Terms
The purchase price is the total amount that the buyer agrees to pay for the business or its assets. Payment terms outline how and when the payment will be made, which may include:
- Lump-sum payments
- Installment payments
- Earn-outs based on future performance
- Stock or equity compensation
Pro tip: Clearly define the payment structure to avoid any misunderstandings or disputes.
2. Representations and Warranties
Representations and warranties are statements made by both parties regarding the condition and status of the business. These may include:
- Financial statements accuracy
- Legal compliance
- Ownership of assets
- Absence of undisclosed liabilities
These statements provide assurance to the buyer and can serve as a basis for indemnification if any issues arise post-closing.
3. Covenants and Conditions
Covenants are promises made by the parties to take or refrain from certain actions before and after the closing. Common covenants include:
- Non-compete agreements
- Confidentiality clauses
- Employee retention commitments
- Maintenance of business operations
Conditions are specific requirements that must be met for the transaction to close, such as obtaining regulatory approvals or third-party consents.
4. Indemnification Provisions
Indemnification provisions outline the circumstances under which one party must compensate the other for losses or damages. These provisions typically cover:
- Breaches of representations and warranties
- Pre-existing liabilities
- Post-closing adjustments
Pro tip: Clearly define the scope and limitations of indemnification to protect both parties’ interests.
5. Closing Procedures
The closing procedures section details the steps and requirements for finalizing the transaction. This may include:
- Delivery of documents
- Payment of the purchase price
- Transfer of ownership
- Post-closing adjustments
Best Practices for Drafting M&A Purchasing Agreements
To ensure a successful M&A transaction, consider the following best practices when drafting purchasing agreements:
- Engage Experienced Advisors: Work with legal and financial advisors who specialize in M&A transactions to ensure all aspects of the agreement are thoroughly addressed.
- Conduct Thorough Due Diligence: Perform comprehensive due diligence to identify potential risks and liabilities that should be addressed in the agreement.
- Tailor the Agreement: Customize the agreement to reflect the specific terms and conditions of the transaction, rather than relying on generic templates.
- Negotiate Key Terms: Engage in open and transparent negotiations to reach mutually beneficial terms for both parties.
- Document Everything: Keep detailed records of all communications, negotiations, and agreements to avoid misunderstandings and disputes.
- Review and Revise: Regularly review and update the agreement to reflect any changes in the transaction or business environment.
Common Pitfalls to Avoid
When drafting and negotiating M&A purchasing agreements, be aware of these common pitfalls:
- Overlooking critical terms and conditions
- Failing to adequately address potential liabilities
- Using overly complex or ambiguous language
- Neglecting to involve experienced advisors
- Rushing the drafting process to meet tight deadlines
The Role of Professional Advisors
Engaging professional advisors can significantly enhance the quality and effectiveness of your M&A purchasing agreement. Consider working with:
- M&A attorneys
- Certified public accountants
- Industry-specific consultants
- Valuation experts
These professionals can provide valuable insights, identify potential issues, and help you navigate the complexities of the transaction.
Conclusion: Ensuring a Smooth M&A Transaction
M&A purchasing agreements are vital for ensuring a smooth and successful transaction. By understanding the key elements and best practices, you can protect your interests and facilitate a transparent and efficient process. Remember to engage experienced advisors, conduct thorough due diligence, and tailor the agreement to the specific terms of your transaction.
Call to Action
Are you planning an M&A transaction? Ensure a smooth and successful process with expert guidance from Indiana Equity Brokers. Our experienced team can help you draft comprehensive purchasing agreements, conduct due diligence, and navigate the complexities of M&A transactions. Contact us today to schedule a consultation and learn how we can support your business acquisition journey.
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Key Mistakes that Could Impact Your Sale
The old saying, “an ounce of prevention is worth a pound of cure,” most definitely applies to any business owner that believes he or she will someday want to sell his or her business. The bottom line is that every business owner has to transition out of ownership at some point. In a recent Inc. article, “Four Mistakes That Could Lower Your Business’s Value and Weaken Its Salability,” author Bob House explores 4 mistakes that could spell trouble for business owners looking to sell.
No doubt House explores some excellent points in his article, such as that you should always have what he calls, “a selling mindset.” The reason this mindset is potentially invaluable for a business owner is that when operating in this way, sellers are essentially forced to stay on their toes.
Or as House writes, “a selling mindset encourages continual innovation, growth, and investment, helping your business stay ahead of the competition and at the top of its potential.” Having a “selling mindset” means that business owners have no choice but to perform periodic reality checks and access the strengths and weaknesses of their businesses.
Mistake #1 Poor Record Keeping
For House, poor record-keeping tops the list of big mistakes that business owners need to address. As House points out, both potential buyers and brokers will want to examine your books for the last few years. The odds are excellent that before anyone buys your business, they will look very closely at every aspect of your financials, ranging from your sales history to your operating costs.
Mistake #2 Failure to Innovate
The next potential mistake that business owners need to avoid is a failure to innovate. House notes that a lack of tech-savviness could make your business less attractive to prospective buyers. The simple fact is that virtually every business is now impacted in some way by its online presence, whether it is the quality of that presence or lack of it altogether.
For House, a failure to maintain an active online presence could be associated with a failure to innovate. Even if your company is innovative, if you do not maintain a coherent and robust online presence, this could portray your company in a negative light.
Mistake #3 Unstable Workforce
House also feels that having an unstable workforce could spell trouble for your business’s value and negatively impact its salability. Most prospective buyers will not be very eager to buy a business that they know has a lot of employee turnover. In general, new business owners crave stability. Attracting and keeping great employees could make all the difference when it comes time to sell your business.
Mistake #4 Delayed Investments
The final factor that House notes as a potential issue for those looking to sell their business is delaying investments and improvements. House states that it is important for owners to continue to invest even if they know they are going to sell. Investing in your business can help it expand, grow and showcase its potential future growth.
Another excellent way to prevent making mistakes that could interfere with your ability to sell your business is to begin working with a business broker. A top-notch broker knows what mistakes you should avoid. This experience will not only save you countless headaches but also help you preserve the value of your business.
Copyright: Business Brokerage Press, Inc.
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