Preparing a 'Winning Tax Planning Strategy' When Selling Your Business

Every Business Owner needs to do some soul searching to create their very own customized version of an exit strategy. Once they do this, they will inevitably discover the most unnerving and costly variable in such a well-thought-out strategy is the tax implications. It is no secret the government is going to extract their “pound of flesh.” (Shakespeare coined this phrase, referring to a lawful but unreasonable recompense describing a rigid process of collecting money.) However, when you see how it affects the largest transaction of your life, you will quickly realize any effort resulting in more favorable tax treatment is an effort worth considering. 

When an Owner begins to strategize how to maximize what they end up with, it becomes apparent that planning the sale of their business is a high-stakes endeavor!

Now if you follow my blogs, you already know there are a myriad of particularly important variables affecting the value of your business in the eyes of a buyer. However, today I would like to focus briefly on a transaction conversation “elephant in the room” - tax treatment. It's true, buyers are extremely sensitive to tax treatment because accounting matters such as depreciation can greatly affect their return on investment. What we do not see very often in our practice is sellers who took pre-transaction tax planning just as seriously.

The biggest thing a business owner can do in this area is to get with professionals to model a plan and create decisive actions. For instance, if your business is a C corporation, you may want to explore making a “pass through” change 5 years prior to the sale in order to avoid what CPAs call “double-taxation.” 

Another source of unnecessary tax burden can often be found “in” the business in the form of outdated/obsolete inventory, equipment, machinery, IT, and antiquated systems. Most of these items are probably written off and/or fully depreciated and no longer serve a useful purpose in your business. My suggestion – GET LEAN: clean all this out, do some housekeeping, and sell or auction off items not critical to delivering value to your current and future customer base. It will make no sense to burden the diligence process and sale negotiations with all of this, and it will create increased administrative efforts and expense required to document, verify, and appraise these items. They often cause unnecessary Q&A between the buyer and seller, further complicating an already complex deal. Bottom line: get your house in order as part of your planning process as this will have several positive effects on deal value and tax liability.

Tax planning is a critical component of every well-conceived transition strategy. To drill down a bit, the way in which a transaction is structured (asset vs. stock sale for instance) can make a difference in the net after-tax proceeds received by sellers. In most cases, truly little in the way of “tax minimization/mitigation” can be done once the sale process is underway. It is always best to implement a strategy years in advance. Having said that, tax is just one element of comprehensive transition planning and letting the tax tail wag the business dog is almost invariably a mistake. Nevertheless, there are often opportunities to include tax-efficient mechanisms in an overall transition plan without unduly sacrificing flexibility or the ability to achieve other key transition goals. 

For the past few years, we’ve enjoyed what we believe is the lowest effective tax rate environment in our lifetimes, and at GaP, we believe taxes are destined to creep (or leap) back up to rates not seen since the Carter Administration. If you are in certain parts of the country, look for tax-favored/incentivized programs when making key purchases such as vehicles, windows, etc. If you are moving or setting up a new facility/location/warehouse, you might consider locating in an opportunity zone. 

The main point is to urge you to get out ahead of these matters since tax laws and strategies are fluid and tax is the largest expense when you go to sell your business.

Boutique Investment Banking Firms like GaP,  can custom model plans to harmoniously find the perfect blend between your personal desires, your financial needs, and your business goals in order to achieve the optimal plan for taking your business to market and transacting with a great-fitting buyer.

Going it alone or without sound planning is risking the life you have created! For the life you want, sound planning and intentional steps take the risk and uncertainty out of the process, leaving only a surefooted path forward.

‍

About GaP Business Advisors

Gilbert & Pardue Business Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A) and through business value-growth services such as Fractional CFO, Advisory Board, Executive Coaching, and Consulting.

Matt Gilbert and Bret Pardue established GaP to provide owners of businesses generally enjoying annual revenue of $5-$75 million with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly-experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.