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M&A Tax Strategies

The portion of our clients who are private founder/owners, often ask us how they can reduce their tax obligations when they sell their middle market aerospace & defense companies. While we are not tax advisors, during our 23+ years, we have seen numerous approaches to reduce taxes, but none has proven as successful as the strategy of gifting equity interests to descendants long before a private owner sells their company.

There are two reasons why this is the favored strategy used by private founders/owners. First, the Internal Revenue Service recognizes that minority interests in privately held companies are valued at a price far lower than a calculated percentage of the value of the company. The IRS and tax courts in the United States formally recognize two significant discounts in this regard: the Discount for Lack of Marketability and the Discount for Lack of Control. We will address each of those in future Deal Notes®. Second, when done years prior to a sale, the appreciation of your company over those years will increase the respective value of your descendant’s ownership, which has the effect of reducing the size of your estate and the estate taxes that would have been paid had you not done the gifting.

Alderman & Company has been the sell-side banker on numerous transactions where our client has gifted ownership to descendants and saved substantial taxes in so doing. As noted above, it is the best strategy that we have seen in our 23 years. However, it requires long range planning, and it requires expert advice from experienced tax advisors. If you are considering selling within the next 5 years, we highly encourage you to retain expert tax advisors now, to start developing an optimal strategy to minimize your taxes when you sell your company.

Have a great day.

Bill Alderman