The months leading up to the sale of a company are intense for the seller(s) and their team of managers and professionals. Creating the Financial Model, writing the Confidential Information Memorandum, preparing a Buyers List, talking with potential buyers, responding to due diligence requests, executing a Letter of Intent, negotiating a purchase agreement, and finally closing the sale − require an immense amount of focus and energy on the part of all team members.
However, long before the sale process starts, sellers should focus on the tax treatment of a future sale and take actions in advance to optimize after-tax proceeds. If not, sellers can be unpleasantly surprised by the amount of federal, state, and local tax liability that might be incurred when their business is sold.
While we do not offer tax advice, we can point out examples of surprises that our clients had to deal with over the 21 years selling companies because they did not plan well in advance of selling:
- Low Basis: large gains resulting in a much higher tax obligation than expected.
- Domicile: claims from another state, other than the seller’s primary residence, asserting domiciled-based taxes.
- Recapture: federal and state tax due to an S Corp or LLC conversion within the recapture period
The above is a very short list of examples of tax issues we have seen our clients experience, potentially costing them millions of dollars, which might have been mitigated if sufficient planning had been done in the years prior to the sale. Like so many issues we address in Deal Notes®, advance preparation is often the key to success. To optimize after-tax proceeds, we always advise our clients to retain tax counsel years in advance of a sale. While some planning can be done close to the time of sale, most tax preparation requires substantial time to implement.
We cannot emphasize enough the importance of retaining tax experts (accountants, attorneys, or both) to help devise a long-term strategy to optimize after-tax proceeds. As we have seen, when done right, professionally prepared long term tax planning can save a client millions of dollars.
Have a great day everyone.
Managing Director, Aerospace