Selling your business is more than a financial transaction. In many cases, it’s the culmination of years or decades of hard work, commitment, and dedication to the partners and people who made your business possible.
When you’re ready to sell, however, capital gains taxes can take a significant bite out of the ultimate value you receive.
A strategic M&A tax plan is crucial in these situations. You can reduce your potential tax liability and secure a more favorable outcome by working with an experienced mergers and acquisitions partner who carefully structures the sale.
The experienced M&A advisors at Walden can help you navigate the complexities of M&A tax laws and develop a personalized plan for the type of business you’re selling, your plans and goals for an exit, and the buyer’s situation.
Disclaimer: Walden is an M&A firm, not an accounting firm, and the following should not be taken as recommendations for specific tax strategies. Seek professional advice from your CPA before making any tax-related decisions.
About Walden Businesses
Walden is a mergers and acquisitions firm that provides business owners with the guidance, resources, and connections needed to successfully sell their company. As former business owners who have first-hand experience selling their companies, Walden’s team of M&A experts is committed to developing transactions that meet the personal and financial objectives of the business owner.
M&A Tax Implications by Business Structure
The taxes you pay when you sell your business are primarily determined by your business structure.
Note: While the buyer may also have tax considerations, this article focuses on the tax implications for the seller.
Sole Proprietorship
When you sell a sole proprietorship, the sale is treated as if you are selling each of your company assets individually. Sole proprietors pay capital gains taxes on every asset that has appreciated in value since your initial investment.
Certain types of assets, such as inventory, may not be subject to capital gains taxes.
Limited Liability Corporation (LLC)
The tax treatment of an LLC depends on its structure and the number of members:
- Single-Member LLC: A single-member LLC can be taxed as either a sole proprietorship or a corporation.
- Multi-Member LLC: A multi-member LLC is typically taxed as a partnership, but it can elect to be taxed as a corporation.
Partnership
The tax framework for selling a partnership treats each partner’s interest in the company as a capital asset.
Selling a partnership stake generates capital gains or losses based on the difference between the realized sale amount and the partner’s adjusted basis.
Adjusted Basis = [ Partner’s financial contributions + taxable income + tax-exempt income ]
minus
[ distributions + taxable losses + nondeductible expenses ]
Corporations
In corporate transactions, the target company may choose to pursue a stock sale, asset sale, or a combination of the two.
Stock sales are more advantageous for the target company because the shareholders shoulder most of the tax liability. In a stock sale, each shareholder realizes gains or losses on their shares.
Corporate reorganizations are usually tax-exempt so long as they follow very strict guidelines.
Purchase Price Allocation
When a buyer considers purchasing your company, they will allocate your purchase price among all of your company assets and assign a fair market value to each one. These assets include real estate, equipment, and intellectual property.
Since you will have to pay capital gains tax on each asset that has appreciated in value, purchase price allocation may have a significant impact on your tax liability.
“During the M&A process, the seller and buyer can reach an agreement on which assets should be valued at which price. In some cases, both sides might agree to establish a lower purchase price in exchange for a favored price allocation,” said John Phillips, President, Walden Businesses.
An experienced M&A advisory team like Walden can navigate these negotiations and help you determine the best course of action. This includes whether a higher purchase price or lower capital gains will be more profitable for you as you structure your transaction.
Creating an M&A Tax Strategy
Every business sale is unique; there’s no one right way to maximize your tax savings. Instead, enlist the guidance of a mergers and acquisitions firm with a proven process and a history of experience in negotiating complex deals.
If you’re looking for a complete team of M&A advisors, contact Walden. Our firm is led by former business owners who have sold their own companies and understand the concerns that you have in selling your business. You can fill out a quick form below, or call us at 678-277-9951.
