So You Want to Sell Your Business
By Harold S. Small, J.D., CPA (inactive), AEP
Selling a business can have many implications and there is much to consider. As a part of any sale, here are some comments regarding major issues that are sometimes overlooked and for consideration during negotiations and after the sale.
1. Make sure that you will get paid. Frequently there is some carry-back financing by the seller or a formula tied to performance of the business that determines the last increment of the sale price that is to be paid. The seller should require and be provided with adequate security to make sure that the final amounts are paid. A security position can be extremely important if the business falters and a bankruptcy later occurs. Also, if there is something tied to performance, make sure that the benchmarks can be met so that you receive the additional sale proceeds anticipated and, if possible, obtain security for the payment obligations being satisfied.
2. Allocate the sale price wisely. In an asset sale (much more frequent than a sale of the stock in the corporation or the sale of the business entity) it is important to consider the tax implications associated with how the sale price is allocated. There is a tug of war between seller and buyer as the seller wants the allocation to items that give rise to capital gains rather than ordinary income. The choice of allocation can have significant tax implications.
3. Representations and warranties are generally part of the purchase/sale agreement. It is important that sellers carefully consider what representations and warranties they can give and also what may give rise to liability after the sale if they are not accurate or complete.
4. A seller may have liability exposure after the sale. Sellers need to consider where they may have liability exposure after the sale and include language in the purchase/sale agreement that limits and/or minimizes their exposure.
5. Legal fees in a dispute can be significant. The seller should make sure that legal fees are payable in collection efforts relating to sale proceeds payable after the close of the transaction as a result of a promissory note or a performance related issue. Should collection actions be needed, the absence of a legal fee provision generally will prevent a seller from recouping the legal fees and costs incurred to obtain payment of the obligations that survive the closing.
6. Estate planning and asset distribution planning is important at all times. Estate planning matters and issues relating to distribution of assets after death are made that much more important in connection with the sale of a business. In fact, this area should be considered at least one year in advance of a sale as some tax savings may be accomplished with appropriate planning. Also, once the business has been sold the liquidity of the estate is changed and the value of the estate may also have been changed. It is time to seek legal counsel relating to these matters prior to the completion of the sale and, if not addressed prior to the sale, then soon afterwards.
There are many other items to consider when selling a business. However, these areas are frequently overlooked. Seek legal counsel well in advance of your plan to sell your business. Also, use legal counsel to assist you in documenting the sale transaction as that may save you considerable time and energy if the transaction goes sour.
IRS CIRCULAR 230 DISCLOSURE: INTERNAL REVENUE SERVICE REGULATIONS GENERALLY PROVIDE THAT, FOR THE PURPOSE OF AVOIDING FEDERAL TAX PENALTIES, A TAXPAYER MAY RELY ON FORMAL WRITTEN ADVICE MEETING SPECIFIC REQUIREMENTS. TO ENSURE COMPLIANCE WITH THE IRS REQUIREMENTS THIS NOTICE INFORMS YOU THAT ANY FEDERAL TAX ADVICE CONTAINED IN THIS ARTICLE OR ANY OTHER ARTICLE OR COMMUNICATION ON THIS WEB SITE (INCLUDING ATTACHMENTS) DOES NOT MEET THOSE REQUIREMENTS. ACCORDINGLY, THE TAX ADVICE IS NOT INTENDED, WRITTEN OR PROVIDED TO BE USED, AND IT CANNOT BE USED FOR THE PURPOSE OF (i) AVOIDING FEDERAL TAX PENALTIES OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTER ADDRESSED ABOVE OR ON THIS WEB SITE.
THE FOREGOING CONCEPTS AND IDEAS ARE GENERAL STATEMENTS AND ARE INTENDED TO PROVIDE CONCEPTS FOR CONSIDERATION IN BUSINESS AND TAX PLANNING. CAREFUL CONSIDERATION NEEDS TO BE GIVEN BY THE READER REGARDING THE USE AND APPLICATION OF THE CONCEPTS. YOUR LEGAL AND TAX COUNSEL SHOULD BE CONSULTED BEFORE THE IMPLEMENTATION OF ANY OF THE IDEAS INDICATED ABOVE OR USE OF THE INFORMATION CONTAINED IN THIS ARTICLE. SHOULD YOU HAVE QUESTIONS REGARDING THIS MATTER, HAROLD S. SMALL, ESQ., CAN BE REACHED AT 12526 HIGH BLUFF DRIVE, SUITE 300 , SAN DIEGO , CALIFORNIA 92130 OR AT 858.759.4600.
© 2011 by Harold S. Small, J.D., CPA (inactive) , AEP