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"I would rather expire at my desk than to sell my business and pay Uncle Sam one dime in taxes." How many owners that have paid their fair share of taxes for twenty years of building their business feel this way? The tax bite is the single biggest factor in an owner's reluctance to sell his/her company.
I have previously written articles discussing various aspects of transaction structures to minimize taxes. As a result, I am often contacted by a panicked seller that is a week from closing his business sale as he looks in disbelief at his accountant's spreadsheet detailing the tax burden of his impending sale.
Recently, the seller of a Sub Chapter S Corporation with an $8 million transaction value contacted me. The tax basis was below $200,000 and $4 million of the transaction value was the assumption of debt. When the dust settled, he was looking at a capital gains tax liability of a staggering $965,000 while only receiving the remainder of proceeds after the assumption of debt. The assumption of debt is considered as part of the capital gain for tax purposes.
The owner sent his accountant's spreadsheet to me and since I am not a tax accountant, I sent it to my tax wizard at BDO Seidman. He found a few small tweaks, but said that there was not much that could be done from an accounting standpoint for this owner. When I reported this back to the seller I could feel his disappointment and frustration.
So I began my quest for a better solution. After several dozen phone calls to my professional network, I was directed to a little known vehicle called a Private Annuity Trust. This vehicle has passed the scrutiny of the IRS and the Tax Court. It is not a way to avoid the payment of taxes, rather a method of deferring them with substantial economic benefit to the owner's beneficiaries.
Dave Kauppi is a Merger and Acquisition Advisor with MidMarket Capital Advisors, LLC. MMCA is a private investment banking and business broker firm specializing in providing corporate finance and business intermediary services to entrepreneurs and middle market corporate clients in a variety of industries. The firm counsels clients in the areas of M&A and divestiture, family business succession planning, valuations, minority interest shareholder sales, business sales and business acquisition. Dave is a Certified Business Intermediary (CBI), a licensed business broker, and a member of IBBA (International Business Brokers Association) and the MBBI ( Midwest Business Brokers and Intermediaries). Contact Dave Kauppi at (630) 325-0123, email davekauppi@midmarkcap.com or visit our Web page www.midmarkcap.com.
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