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We recently completed a Merger and Acquisition engagement to sell our client to a large publicly traded company. Our client had started her company 25 years ago and had set it up a C Corp. She never was advised to change that structure in preparation for a much better tax treatment on the sale of the business.
The buyer had an acquisition policy of only asset sales and no stock sales. The tax implications to our client were punishing. In a C Corp Asset Sale, there is no such thing as a long-term capital gain for the corporation. Since our client's basis (a software and consulting firm) was essentially $0, the entire sale amount would have been treated as ordinary income and would have been taxed at a rate of about 30%. Once taxes are paid by the corporation and a distribution is made to the stockholders, the stockholders are then taxed at the 15% individual long-term capital gains rate.
Let's say that the purchase price was $5 million. With an asset sale, the Corporation would first pay 30% of $5 million, or $1.5 million. On the distribution, the shareholders would pay 15% of the $3.5 million distribution or $425,000. The total tax paid is a whopping $1,925,000. Net proceeds to the seller are $3,075,000. A stock sale, on the other hand is far superior for this C Corp.
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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