Selling a company is a complex and time consuming process. Therefore, it is important to assemble the right team of advisors to manage the process for the owner(s) of the company being sold. The right team can be the difference between receiving full value for your company and selling at a discount. With the right advisors, you are likely to see a noticeable contrast in your results, including keeping much of the proceeds vs. giving large sums up in taxes, protecting shareholders post-transaction vs. dealing with potential liabilities for years after the transaction, meeting your personal financial goals vs. being disappointed in long-term prospects and even whether or not the transaction takes place. A key member of the transaction team is the Tax Advisor.
Selecting a Tax Advisor for Your M&A Transaction
When it comes to selling a company—or any asset for that matter—it is not about what you get; it is about what you are able to keep. Each transaction has an interested party that is not at the deal table—Uncle Sam. One common goal should always be to identify ways in which to minimize the tax burden on you, as the seller, as well as on the buyer. For this to work, it is important that your tax advisor understands that a seller and buyer often have competing interests in various deal structures, elections and purchase price allocations. Simple changes to the structure of a transaction may have a profound impact on the taxes owed.
A CPA or tax attorney with extensive transaction tax knowledge is a critical member of your transaction team (this person may not be the same person that prepares your company’s tax return). In selecting the tax advisor(s), it is important to balance the benefits of an incumbent tax advisor with access to key historical client information but also one with experience in M&A deals and relevant issues depending on the existing entity structure (C Corp, S Corp, LLC/Partnership) and possible deal structures.
Qualifications & Experience of a Tax Advisor
As a diligent seller, you should evaluate the qualifications of the tax advisor you will hire. Particular attention should be paid to overall experience as well as special knowledge related to the type of transaction being contemplated and to your industry.
Determine Your Options
Not all transactions are the same. You may sell all or just some of your company, and, therefore, have different tax treatments for either option. Many deals also require or allow for a rollover of partial equity by the selling party. How this is structured can impact your ability to defer taxes on the rolled equity. Other factors could easily affect the taxation of proceeds—including companies with multi-state operations, owning real estate outside your business entity, existence of passive and active owners or existence of resident and nonresident owners. Nonetheless, an experienced tax advisor can help navigate these issues.
Further, the type of company being sold is of paramount importance. An LLC or LLP will have pass-through taxation. A C-Corp will likely have corporate tax and then individual taxes with which to contend. An S-Corp, depending on when it created its S election, could have Built in Gains tax as well as pass-through taxation. How your company operated prior to sale may have a major impact, too. For example, did your company use accelerated depreciation of assets? Is there extensive debt in the company? In short, the complexity of a transaction and the resulting tax implications can be quite large. A competent tax professional can save a seller (as well as a buyer) substantial amounts of money.
Industry knowledge is often important when structuring deals to minimize tax burden. Not every industry has the same rules when it comes to taxes. Therefore, it is important to consider the industry experience of the tax advisor being added to the transaction team. While it is not critical that the advisor specializes in a certain industry, exposure to that industry and an understanding of related tax rules is highly desirable.
Additionally, international tax laws can create a whole new layer of complexity. If you, the seller, are located in more than one country, or the buyer and you are based in different countries, hiring an advisor with international tax law experience may be critical. Depending on the circumstances, a seller may find it necessary to hire an international tax expert in addition to a transaction tax specialist.
The Right Team for the Job
As with all of the members of the transaction team, the seller’s investment banker can provide a list of tax advisors to consider. Please contact our team with questions or for help during the sale or purchase of a business.
To read about selecting an investment banker, attorney and wealth advisor to drive a successful transaction, read the following articles:
Building an M&A Team: Selecting an Investment Banker
Building an M&A Team: Selecting an Attorney
This report does not provide legal, tax or accounting advice. Before making decisions with legal, tax or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation.