Sale of a Business
There are many ways to affect the sale of a business. Typically, a business owner thinks, "I'll just sell the stock." Buyers typically don't want to buy stock and generally are advised by their legal and tax counsel against buying stock. Many owners find that they don't have stock to sell; they are sole proprietors, partners, or "members."
Considerations in the sale of business interests include the universe of potential buyers (known or unknown third parties, family members, or current co-owners), how the purchaser will fund his acquisition, present owners' future plans, existence of buy-sell agreements or other governing documents, limitations on transfer of interests, sale of an interest back to the business itself, charitable gifts of a portion of the business to be sold prior to a binding obligation to sell, and tax consequences (current and future) to both buyer and seller. Perhaps the overriding consideration is whether an outright sale of stock is the proper vehicle to dispose of a business interest. Gift, asset sale, redemption, recapitalization, merger, liquidation, reorganization, spin-off, split-off, or split-up, leveraged buyout, or more esoteric options such as "private equity sponsored leveraged recapitalizations" are possible alternatives. Frequently, a combination of several of these alternatives may be most advantageous.
The tax consequences of a business sale can be significant and depend on the type of business interest being sold, the nature of the property sold, character of gain or loss on the sale, timing of the sale, timing or receipt of the proceeds of the sale, how the proceeds of the sale are used to retire the selling owner(s), and the selling owners' tax considerations outside of the business sale. A sale of stock typically, but not always, produces capital gain to the selling shareholders. Sale of partnership interests, however, typically result in a combination of both capital and ordinary income since the selling partner is consider to have sold his interest in each asset of the partnership. Sale or exchange of fifty-percent or more interests in a partnership within a twelve-month period terminates the partnership for tax purposes and may produce unintended, and unfavorable, tax consequences.
Death of a business owner and subsequent disposition of his or her interests present special tax planning opportunities. Sale of a business interest in exchange for an installment note may (but not always) postpone gain recognition (and taxation) until the seller receives cash with which to pay the tax liability. Under certain conditions an exchange (rather than sale) of assets between or among owners may accomplish their business objectives and allow one or more of the exchanging owners to defer tax recognition.
Properly planned, it is possible to meet a business owner's financial and other non-tax objectives while at the same time minimize the tax consequences on the disposition of business interest. To do so requires careful planning. We have helped our clients to sell various types of business interests as well as some or all of the assets of a business. In doing so, we work closely with the clients' legal counsel and investment advisors. Let us help you dispose of your business interest in a manner that best meets your overall objectives.
©2008 Ronnie C. McClure, PhD, CPA