February 20th, 2008 quantum
In order to effectively negotiate and structure the sale of your business, you need to be aware of the tax impact of the transfer and how to minimize your liability. Summarized below are the income tax considerations that apply to the sale of a business. Your own tax adviser should assist you in applying these considerations to your specific situation.
Income Tax Considerations
The rules for computing the income taxes with respect to the sale of your business is extremely complex and it is important to obtain sound tax advice early in the sale process and before you enter into a binding purchase and sale agreement so that you can avail yourself of tax-savings opportunities.
In considering the income tax consequences of the sale of a business, several factors need to be considered:
- Whether your business is conducted individually or through an entity
- If you conduct your business through an entity, how the sale is structured – i.e., whether you sell the entity or the entity sells the assets
- Whether you receive the sales price in a lump-sum or in installments
- If an asset sale, how the sales price is allocated among the different categories of assets - an intricate process (see below).
- Whether any of the consideration received from the sale is paid as compensation for future consulting or employment services
These factors will dictate which of the four separate tax rates will apply to the proceeds of the sale. An overview of the applicable rates is as follows:
1.) Ordinary income rates - The highest marginal tax rate is 35 percent.
2.) Long-term capital gain rate – This rate applies to the gain from the sale of a capital asset which has been held for more than 1 year (if held less than 1 year, it is taxed as a short-term capital gain and the ordinary income rates apply) and is generally 15 percent.
3.) Real Estate Depreciation Recapture Rate – This rate is 25 percent and only applies if you’re selling real estate as part of the sale of your business.
4.) Corporate Income Tax Rate – The corporate income tax rates range from 15 to 39 percent; in addition, the owner then pays individual income taxes upon receipt of the sale proceeds in the form of a corporate distribution – hence, there is “double taxation” when a C corporation sells appreciated assets and then distributes the proceeds to its shareholders.
Note that if instead of the corporation selling its assets, the C corporation shareholder sells her stock of the company held more than a year (i.e., an “entity sale”), there will be only a single tax of 15 percent – the long-term capital gain rate. If this is not possible, because the buyer insists upon an asset sale, fortunately, your exposure to “double taxation” can sometimes be somewhat minimized by again, structuring the transaction in a certain manner (for example, by having a percentage of the sale proceeds paid to you individually for a covenant not to compete or for consulting). There is also the possibility of converting a C corporation to a Sub-Chapter S corporation prior to the sale (which might eliminate your exposure to a double tax); however, there may be exposure to tax at the highest corporate income tax rate if the corporation held assets, prior to the conversion, with a fair market value greater than their tax basis.
By reviewing the tax consequences in advance and presenting the proposed sale structure in a certain manner, you have a better chance of completing the sale on your terms and conditions.
For more information on the Sale of business, keep visiting Quantum™ Blog.
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January 30th, 2008 quantum
The final part of our Seller’s checklist series includes all those details that are not included in first 5 parts posted to our blog earlier. Following is a list of items which should be addressed and included as part of the materials provided to a prospective buyer.
Miscellaneous:
- Business Insurance (provide copies of the policy statements or declarations page), including:
□ Group hospitalization and medical
□ Malpractice or Errors and Omissions
□ Workman’s Compensation
□ Business automobile
□ Life (key person and employees)
□ Health and disability
- Any collective bargaining agreements
- Employee stock option plans
- Accumulates sick leave and vacation liabilities
- Severance pay agreements
- Pension Plans
- Simplified Employee Pension Plan (SEP)
- Keogh plans
- 401 (k) plans
- Deferred benefit plans
- A description of any business community involvement
This creation of a prospectus or Sales Memorandum incorporating the various materials from the six part “Seller’s Checklist offers a presentation that educates the buyer on the many intangibles inherent in your business, hence raising the perceived value to the acquirer and communicates to the buyer that the business is well organized and easily transferable. These intangibles include among others, name recognition, market niche, vendor relationships, operation and production systems, distribution channels, customer loyalty and trained and skilled employees.
Thus, the creation of the Prospectus or Sales Memorandum presents the business as unique market opportunity with huge potential for growth and expansion thereby streamlining the process of selling your business.
Key Points To Consider:
• Disclose all relevant information – even negative facts. A buyer wants to be able to trust you. Any indication that you’re not truthful or that you ailed to disclose all pertinent information can put off an otherwise interested buyer. Realize that during the due diligence stage of the purchase a savvy buyer will likely investigate all aspects of your business and discover negative facts anyway.
• Ensure that the business premises are well organized and in good shape. First impressions are very important. At some point, an interested buyer will want to visit the business location and it is important o ensure that you create a good impression. How you maintain the business premises will go a long way toward communicating that the business itself is well organized and running efficiently. Therefore, apply fresh coat of paint, make minor repairs (especially if the repairs are the responsibility of the landlord) and organize and clean the premises.
Keep visiting Quantum™ Blog for more valuable business brokerage assistance.In addition, you can discuss this topic on our forum - www.qbsnet.com/forum - by opening a thread.
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January 26th, 2008 quantum
Continuing from the last post … this item in the checklist educates the buyer about the intangible inherent in the business being sold, raising the perceived value to the acquirer, and communicates to the buyer that the business is well organized and easily transferable. Intangibles include among others, name recognition, market niche, vendor relationships, operation and production systems, distribution channels, customer loyalty and trained and skilled employees.
Financial and Business Forecasts are often necessary when the business to be sold is a start-up or has little operating history to enable the buyer to formulate a business plan and justify growth and expansion of the business in the future.
Following are the things that should be included under Financial and Business Forecasts:
1. Pro forma financial statements for the next three (3) years
2. Planned new products or services
3. Potential new business markets and any supporting documentation
4. A description of any emerging new technology to be exploited
These points if covered in the checklist provide the buyer guidance and support the multiple upon which the the selling price is based.
Quantum™ Business Solutions Network, offers guidance at every step of a sale process.
Keep visiting Quantum™ Blog for more information on business sale and purchase transactions.
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December 24th, 2007 quantum
The list price for a business is usually a multiplier of Seller’s Discretionary Earnings or “SDE.” In order to prepare adjusted financial statements and determine SDE, an audit trail must be created to support representation of the Seller during due diligence. Toward that end, below is a partial checklist of items to assemble once you commit to the sale of your business.
Following things should be included in financial history:
1. Profit and loss statements for the previous 3 years
2. In order to establish the true earning capacity or cash flow for the business and
demonstrate how profitable it truly is - review each expense item reflected on the
yearly profit and loss statements requested above and create a schedule of all the
unnecessary items not essential to operate the business. These include all
“discretionary,” (owner perks and benefits such as automobiles, boats and planes
for personal use, excess or unnecessary labor or salaries [i.e., family members on
the payroll], unnecessary travel and entertainment, contributions to retirement or
personal insurance plans and extraneous personal or unnecessary expenses
including telephone, repairs, etc.) “non-recurring” (moving expenses)
“extraordinary” (gain or loss from the sale of business equipment) or “one-time”
(equipment purchases not made in the ordinary course of operating the business)
expense items
3. Balance Sheets for the previous year
4. Copies of all documentation related to the ownership of intellectual property including the establishment of all copyrights, trademarks, service marks,trade names and patents
5. Contracts
- Janitorial and maintenance contracts
- Landscaping contracts
- Telephone answering service or other service contracts
- Order fulfillment service contracts
- Uniform and laundry contracts
- Fuel service contracts (bulk oil, propane, etc.)
- Advertising and marketing contracts
6. A schedule of business long-term liabilities, including:
- Real estate loan documents
- Promissory notes, outstanding lines of credit, etc.
- A schedule of any outstanding officer’s loans, including supporting documentation, if any
7. Web site statistics, including: (a) percentage of organic versus pay per click traffic (b) conversion rate, (c) list of search engines in which indexed, (d) organic ranking information for various key words for each search engine, (e) pay per click budget per month broken down by each key word for each search engine, (f) number of one-way links, if any (g) number
of unique visitors each day, (h) number of page views each day, (i) any
online review sites (if so, provide links) and (j) hosting information.QBSNet, can assist you in documanting and packaging your business for sale in an organized and presentable manner.
For more assistance in business transactions, visit Quantum™ Blog.
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December 13th, 2007 quantum
It is important for business sellers to provide certain important information to prospective business buyers. As mentioned in a previous blog post, this is done for them to get a comprehensive overview of the seller’s business. Thus, proper preparation is necessary for the best presentation of your business and is required in order to provide meaningful insight to prospective purchasers. To accomplish this, the business must be properly packaged with all applicable records and facts organized and documented in the most strategic way to maximize potential value. This ensures a presentation of our client’s business in the best light, while providing the purchaser with a solid audit trail to corroborate the seller’s representations of value. In this post, we examine the need for the seller to provide the business with certain legal and marketing information.
The legal information provided will enable the buyer to ensure that the business is operating in compliance with laws governing the particular industry.
The marketing information provided will allow the buyer to assess existing marketing/advertising efforts of the seller and determine additional avenues to pursue ion order to further grow the business.
Therefore, the following legal and marketing checklist items, if applicable, should be provided by the seller to the buyer:
Marketing Information:
- Sales catalogs, brochures, fliers, etc.
- Advertising examples
- Overview of web site
- Product specification sheets
- Marketing plans
Legal Information:
- If incorporated, copy of Articles of Incorporation
- If incorporated, copy of By-laws
- If incorporated, copy of organizational Minutes
- If Limited Liability Company, copy of Operating Agreement and LLC organizational Minutes
- If partnership, a copy of the partnership agreement
- A copy of any joint-venture agreements
- A copy of any fictitious business name filings
- A copy of any sales and use permits
- A copy of any real estate deeds and/or leases for real property available as part of the sale of the business
- Any zoning approvals
- Any state or federal licenses
- Any franchise agreement if the business offered for sale is a franchise
- A copy of the complaint for any pending litigation
- Copies of all documentation related to the ownership of intellectual property including the establishment of all copyrights, trademarks, service marks, trade names and patents.
Including the above mentioned information in your checklist will enable the buyer to assess your business and decide it viability as a valuable business opportunity.
Keep visiting Quantum™ Blog for more updates.
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December 1st, 2007 quantum
In a previous Blog Post titled, ‘Checklist for Business Sellers (Part 1 of 6), a list of 6 categories provided for organizing the information and documentation which is important for an organized presentation of your business. In the current blog, the first category of the checklist i.e, ‘Business Overview’ is further categorized into key topic headings for organizing your data concerning the business.
Business Overview:
- Description of the business
- Personal profile/resume of the business owner/manager
- Reason for the desired sale of the business (try to allay any suspicion that you are trying to unload a business with hidden problems)
- The business products and/or services (include photographs, if appropriate)
- A description of the primary business markets
- A listing of the primary customers of the business
- A listing of the primary suppliers of the business
- Any major or primary customer testimonials
- Any significant items evidencing industry recognition (i.e., awards, reviews, favorable media attention or comments, citations, etc.)
- A schedule of key-employee personnel (including short personal biographies) with an organizational chart. Important note: A competent manager can be a very strong selling point. If your business is large enough to have an experienced manager, other than yourself, who can stay with the business, emphasize this individual’s talents and potential. Having highly experienced people on staff communicates to the buyer that the future success of the business isn’t dependent on you as the owner
- A schedule of owned and leased assets, including photographs if appropriate
- Provide the primary locations of the business
- Provide copies of contracts with employees and independent contractors
Quantum™ Business Solution Network will guide and assist you in compiling relevant information for your business and create a detailed profile or prospectus.
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November 13th, 2007 quantum
At Quantum, this is the first step in the sales process. During this stage we typically conduct a client interview, determine sale objectives and obtain pertinent information. We then assemble financial and general information on all aspects of your business.
Proper preparation is necessary for the best presentation of your business and is required in order to provide meaningful insight to prospective purchasers.
The business must be properly packaged with all applicable records and facts organized and documented in the most strategic way to maximize potential value. This ensures a presentation of the seller’s business in the best light, while providing the purchaser with a solid audit trail to corroborate the seller’s representations of value.
The checklist includes items that will help a seller in preparing a business for sale. The checklist items, if applicable, should be assembled into a book, appropriately bound and tabbed for easy reference. This checklist enables the seller to formulate an organized presentation and an opportunity to provide the buyer with a concise and a complete overview of the business.
The checklist generally contains the following categories of information:
1. Business Overview:
2. Marketing Information
3. Legal Information
4. Financial History
5. Financial and Business Forecast
6.Miscellaneous
Detailed information about each point mentioned above shall be provided in subsequent blog posts.
Visit Quantum™ Blog for more information on business transactions.
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November 6th, 2007 quantum
Preparing a business for sale is the first step in the sales process. Business Brokers guide the sellers in the preparing their businesses by conducting interviews and obtaining pertinent information. Brokers assemble financial and general information on all aspects of your business.
Proper preparation is necessary for the best presentation of your business and is required in order to provide meaningful insight to prospective purchasers. While preparing the business for sale brokers engage in Asset Analysis and Structuring, where review and analyze of the assets you hold within your business is conducted and also legal structures you might consider using to better protect those assets and possibly enhance their value are suggested. In fact, you may even be unaware that you hold many of these assets. The appropriate structuring and accounting for those assets is likely to greatly enhance the value of your business.
The business must be properly packaged with all applicable records and facts organized and documented in the most strategic way to maximize potential value. This ensures a presentation of the seller’s business in the best light, while providing the purchaser with a solid audit trail to corroborate the seller’s representations of value.
Employing professional business brokerage assistance for preparation of a business for sale can prove beneficial for you to acquire a suitable business opportunity.
We at Quantum™ Business Solution Network, help you to acquire a lucrative business opportunity by guiding you at every step of a sale process.
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