As a successful business owner, it is important to prepare for the unexpected. Whether you are selling your business out of necessity, convenience, or profit, proper planning must occur to protect your assets.
If you are thinking about selling a business, taxes should be the first thing you should start preparing for. Depending on the specifics of the business, unexpected M&A tax issues may arise.
Gains Versus Income
Before you figure out anything to do with taxes, you have to know the valuation of your business. Without knowing this, it is impossible to estimate the trajectory of your taxes. The amount of taxes you pay is also determined by the valuation of your business and helps you minimize the amount of taxes you actually pay. Business valuation is based on both the art and a science that factors in all aspects of your business, we’ve found.
There are multiple phases during the sale of a business. Each part of the business is considered its own entity, each of which will be taxed as such. For example, if you have any inventory that may be worth a significant amount, you run the risk of paying additional taxes. Once the individual assets are determined, they are then labeled as intangible or tangible – meaning you need to determine whether they are a physical item or a facet of your business like a trademarked concept or name (of either the business or a product).
Identifying whether these assets are ordinary income or capital gains is the next step. Capital gains are revenue generated from selling assets. Examples of capital gains range from office furniture to investments. Essentially, anything that is a part of the business could be classified as a capital asset. If the asset being sold has been in the business’s possession for at least a period of one year, it is considered a long-term gain. Any revenue from something that has been owned for less than a year is considered a short-term gain. Long-term gains are taxed much less than short-term gains at only about 15-25% and 35-50%, respectively.
Ordinary income is what you traditionally think of as earned income, which is the money business owners pay themselves. Like any other income, the tax is determined using the tax bracket system. For 2021, there were seven tax brackets ranging from 10% to 37%.
Assets classified as both capital gains and ordinary income can have a significant impact on the tax bill during a business sale. Minimizing these is a priority for most business owners and M&A advisors alike.
Business and Deal Structures
Outside of assets, the structure of your business and how you structure the sale of your business is vital to maximizing profit and minimizing stress. The way you are able to structure a sale is entirely dependent on what the business is classified as:
- Limited Liability Company (LLC)
Each of these business structures comes with its own unique set of tax rules, varying in level of complexity.
Depending on that, there are a multitude of ways that a deal can be structured to make it the most effective and feasible for you.
- Installment Sales
- Some may find that having an installment sale is the most feasible way to manage taxes on a closed transaction of a business. Doing this means that the payments are received at a specified rate, usually either monthly or annually – allowing you to pay taxes in chunks rather than all at once. Tax payments can be spread out across the span of years, creating less of a burden on your bank account.
There are some downsides to using installment sales. They can only be utilized with capital gain income. With any other form of an asset sale, like ordinary income, the taxes must be paid within the same year as the sale of the business.
- Stock Exchanges
- For businesses that are either a C-Corp or S-Corp, you have the option of constructing a stock sale. This means that the person or entity interested in purchasing the business could do so through buying stock rather than the business itself. You can also exchange stock as a form of selling a business, which is a tax-free option that many business owners take advantage of. The only challenge for this type of sale structure is that the stock must be anywhere from 50-100%.
Look to the M&A Experts for Advice
After you’ve considered these tax implications, it’s time to start searching for an appropriate M&A expert. Working with an M&A advisor can be extremely beneficial as you navigate tax implications when selling your business, especially if you have a complex financial structure. Not only can our company give you the guidance you need to feel confident in selling your business, but it also protects your assets – leading to a more sound transaction.
With Persient, your transaction will be handled by professionals who have studied and have extensive experience in M&A tax issues. Your M&A advisor will guide you through each step of the process, leaving no stone unturned as you sell your business. Contact us today to schedule a consultation.
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