- December 14, 2012, Gary Hermsen
With the “fiscal cliff” looming, there is plenty of uncertainty ahead. One thing that is almost certain is that there will be changes to the US tax code. It’s a matter of how much and how soon. We don’t know if the Bush-era tax cuts will be extended and/or for whom. Regardless of what happens, you will likely be meeting with your accountant and tax advisor in the coming months.
When you meet, we suggest you consider having a conversation about exiting your business no matter how far off that may be. Selling your business is a taxable event, and while you can’t control what the capital gains rate is going to be, you do have control over some things. The corporate structure of your business may impact how much you will pay in taxes when the sale is complete, and how you handle cash flows/expenses in the three years leading up to the sale may impact the price you get.
If you are five years or more away from selling your business, now is a great time to talk to your accountant about your corporate structure. The owner of a company that is set up as a C-corporation versus an S-Corporation or LLC stands to pay twice as much in taxes if the sale gets structured as an asset sale (as most sales do) versus a stock sale. If you do need to make a change in your corporate structure, the more time you allow, the better off you are.
We all want to minimize our taxes, but minimizing your corporate tax burden by showing more expenses can impact the value of the business. Many business owners run expenses through their business that could be considered personal—think cell phone, auto expenses, etc. I recently advised the owner of a flexible packaging company that has run such expenses through the company to stop doing that for the next three years as he prepares to sell. (That is typically how far back buyers look at financials.)
The increased net income will result in a higher tax effect, but it will also show cleaner financials with more cash flow available to the buyer, ultimately resulting in a higher purchase price that should more than offset the extra taxes paid over the three years.
I know adjustments can be made to reflect expenses that aren’t necessary for operating the business, but the more adjustments you make, the more scrutiny a buyer will place on the financials.
Food for thought, as always, talk to your accountant and mergers & acquisitions advisor about what steps you can take to be sure you are positioned to minimize taxes and maximize value.
Gary Hermsen is an M&A advisor for Cornerstone Business Services. He has 13+ years of experience in the converting industry as an owner and former owner/operator of a paper converting company and more recently as an advisor to others in the industry. Contact him at 920-436-9890; firstname.lastname@example.org.