M&A: Things Sellers Should Not Overlook

Posted on Fri, Nov 22, 2019 ©2021 Drucker & Scaccetti

MELISSA BANION - OFFICIAL - 2016By: Melissa Banion, CPA, MT

 

After much deliberation, you have finally decided to sell your business.  Whether you formed the company yourself and built it from the ground up, inherited it from your family, or bought it years ago from another entrepreneur, deciding to sell it is a big decision.  But the decision making doesn't stop there.  Several important aspects of the transaction should be considered during the process and The Tax Warriors® at Drucker & Scaccetti are here to remind you what to not overlook as a seller.

 

Hire a quality advisory team - The attorneys, CPAs, and broker of the transaction will be the key players on your team.  These professionals will work through the terms of the sale with you, review all relevant documentation, and negotiate on your behalf.  It is critical to find a team that has credibility and experience with buying and selling businesses.  They should communicate and work together to reach the best possible outcome.  When looking for professionals to assist you, consider referrals from people you know and trust.

 

Know the market - Before agreeing upon a sale price, make sure you are familiar with the current state of the market for the business you are selling.  Maybe it's not quite the right time to sell, or perhaps it is an excellent time and you need to expedite the transaction before certain factors change.  Compare prices of similar businesses to make sure the offer you receive is competitive.  When comparing prices, consider factors such as industry, size, income, etc.  Also, try to get a feel for demand when evaluating the current market atmosphere so you have leverage when negotiating.

 

Incorporate all important terms in the Letter of Intent The Letter of Intent is often provided by a potential buyer to outline initial terms in the proposed transaction.  It is not binding on either party. However, it lays the groundwork for reaching an understanding and setting expectations early as to how the sale agreement will be formalized at settlement.  Because the Letter of Intent is often provided by the buyer, make sure to request any terms you feel should be included in the document.  Terms important to the seller and not included in the Letter of Intent can be forgotten and could potentially not make it into the final agreement if written by the buyer's attorney.

 

Anticipate the due diligence process - Significant information needs to be supplied during the due diligence process and this can take some time if you're not organized from the beginning.  Many businesses use an online data storage room to house the information so all relevant parties can access it when needed.  This process can be lengthy, which is sometimes unexpected if you are new to the sale process.  The length of the process will depend highly upon readily available and organized information, as well as the thoroughness of the buyer and buyer's team.  Be prepared for various requests for information and plenty of discussion regarding the information in the requests. Your key advisors will be important here to ensure your business documents are up to date, your financial statements are in good shape, and you have planned for after the transaction.

 

Value your assets appropriately - The sale price will largely depend upon the value assigned to your assets (unless the deal is structured as a stock sale).  Don't take the easy way out and use your asset book values because the assets could be worth much more than what is on your financial statements.  For example, work in process is often overlooked when valuing assets because the work is not yet complete.  If the work will be finished before the sale, include the full value of the finished product when valuing the business.  It is important to carefully evaluate every asset on your balance sheet and thoughtfully consider how to maximize your sale price. 

Equally important is to understand your after-tax sale proceeds.  The entire transaction should be modeled out and all financial impacts included to assist with cashflow planning and to help identify terms within the deal that can be improved.  Representation and warranties insurance should also be considered to protect you as a seller from potential claims, especially for deals over $50 million in a good market. The buyer may help with this cost, so it is worth asking about during negotiations.

 

Consider transaction cost deductions - When considering costs of the transaction, it is important to identify who is bearing the cost and how it should be classified for income tax purposes.  To avoid confusion or ambiguity, the costs should be listed clearly within, or as an exhibit to, the sale agreement.  For tax purposes, determine whether the cost should be capitalized and included in the gain or loss computation, or deductible as an ordinary and necessary business expense.

 

Don't forget state and local taxes - Be sure to consider the state and local tax implications resulting from the sale.  Very often, sellers and their advisors are so focused on the federal tax effects of the sale that the state and local tax liabilities are a surprise when not anticipated in preliminary stages of the deal.  Consider the structure of the transaction and whether or not state tax law will follow the same federal tax treatment.  Aside from the income state taxation of the business and the sale, payroll and sales tax implications also play an important role and often surface during the due diligence process.

 

There are many factors to consider when selling your business.  Hopefully the points discussed here have triggered some thoughts to assist you with making the best moves toward the most favorable outcome.  Call on The Tax Warriors to assist you with the details and advise you on the many other considerations that should be made based on your specific facts and circumstances.

 

 

Topics: Sales Tax, Payroll Taxes, state & local taxes, Selling a business, M&A, Business Valuation, mergers & acquisitions, Letter of Intent, deal structure, after-tax sale proceeds, transaction costs

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