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Keep More $$$ Post Business Sale: Thinking Before, During & After
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A few weeks ago, I talked to a real estate developer who is looking at a $200 million exit. He was set to close in 6 weeks and was interviewing CPAs to help him mitigate his tax bill π€¦. I was second on the list after a lady calling herself Tax Goddess - which I wasn't sure how to take, honestly. But I'll share here what I told him on that call - tax planning for a sale of a business is best done in three phases:
Let's dive in. Obvious caveats here - not your accountant, not a lawyer. These are just ideas for educational and informational purposes. Talk to a professional and don't rely on anything without paying for proper advice. Before the SaleTrusts π¨βπ©βπ¦βπ¦ - You want to take advantage of your lifetime gifting exemption with liquidity events this large. That usually means putting a chunk of the ownership into irrevocable trusts, a family limited partnership owned by these trusts, or gifting ownership directly to the next generation - depending on your scenario. The object here is to gift when values are low, so the appreciation is captured inside the trusts / new owners at the time of sale. Structuring ποΈ - You want to anticipate the type of sale you'll have. This is driven by the type of buyer you'll be courting for a sale. If it's a public company interested in rolling up, they may be more interested in stock sales. If it's a private buyer or other small business, they will usually prefer asset sales. The object here is to have asset sales done through S-Corps or partnerships, and stock sales done through C-Corps. If you're a C-Corp that will sell it's assets and you could qualify as an S-Corp (see S-Corp ownership rules), making an S-election and waiting 5 years could save your millions. Also time to double check your S-election is valid if you're an S-Corp (form is on record and the operating agreement doesn't have bad language). Accounting & Audits π - You don't want to wait for the quality of earnings to know where your exposure is. For many buyers spending over a certain amount ($10-$20 million), they'll insist on 2-3 years of audited financials. The problem is these audits take more than 1-2 months to do - at least well and/or affordably. The goal here is to be able to plop the audits on the table to speed up the buyer's due diligence process. Indirect Tax Audits π«΄ - You want to know where your dead bodies are buried. And indirect tax is often a place where buyers go to work in clawbacks and escrow requirements. Indirect tax = state tax, sales tax, property tax, excise tax, etc. If you do business in multiple states or jurisdictions, consider getting a nexus study to know your max exposure beforehand. During the SalePurchase Price Allocation π€ - You want capital gains, the buyer wants ordinary deductions. This is a problem. If you're selling a business, you'll also have to file a tax form (Form 8594) to make sure no shenanigans are being played. You can have a valuation done, but things like value assigned to inventory, bonus-depreciation-eligible assets, land, building, and goodwill are usually up for negotiation. As a seller, you want as much value assigned to land and goodwill - as that's capital gain territory. Control of Tax Returns π - You want the ability to review, ask questions, and approve the final K1 you're going to receive if it's not your guy responsible for filing it. Depending on how the buy-out is structured, you could lose control over any influence in the tax return preparation. And if the buyer is using a CPA not experienced in M&A, it could spell trouble for your tax estimate. Don't Stop Running the Business πββοΈ - You can't take your eye off the ball. Not only could the deal fall through, but even if it closes it will likely have a working capital true-up. Meaning, the buyer will calculate how much working capital is required to run the business after acquisition. And after a period (1-3 months), will do a true-up calculation to see if the business provided that or if they had to come out of pocket to add it. Basically, if you get too distracted during the sales process, the business can suffer and working capital can suffer. Seller Note Beware π§ - You don't want to be surprised by phantom recapture gain from a seller note. A lot of business purchases will come with a seller note portion that has to be on standby for X years. Seller notes allocate a portion of the proceeds (and gain) to be deferred until actual payment happens. This is a great deferral tool, but unwary sellers should know that recapture gain is not eligible for this same deferral. Meaning - if you sell recapture gain assets, you may have a year 1 tax bump without the cash related to it. Again - this goes back to negotiating the purchase price allocation and knowing what to expect. After the SaleFollow the Plan πΊοΈ - (1) Fund the Trusts you set up, and (2) Make the charitable donations in the same tax year as the gain or in the year you planned to do it. The year of a sale is likely one of the highest tax years in your life so you need to follow the directions from the professionals you engage. If you're gifting X amount to trusts - make the gift. If you will be donating to charities - make the donation. It's wild to say, but you actually have to do these things. Make Sure the Forms are Filed π - You can't delegate responsibility to file your taxes. The same goes for all required filings that go along with the tax return in the year of the sale. For example, if a F-Reorg is being performed, you have only so many days to ensure proper forms are filed to keep in compliance. This goes back to knowing who is in control for filing what. Track (or Recreate) Your Basis π - In the year of a sale, basis is your friend. You want to be sure that you've captured all your outside basis adjustments to the ownership interests and / or assets you're selling. Did you loan the company money that didn't get tracked? Did you buy out an old partner "on the side"? All these things matter when calculating gain. It's also time to track your basis accurately for any new assets purchased with the proceeds. β We didn't get into all of these on the call - mostly because I can't stand "dance monkey dance" calls πΊ where it feels like I'm being pumped for all my alpha - but this is the general outline of how I think about big exits. Have a great week ahead. π«‘ π₯ Hottest Finance Posts This Week π₯β
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