Selling a business can be a particularly difficult process. Navigating the seemingly endless list of action items that will maximize the value of your company can be daunting. With over 20 years in M&A, Boyne Capital has guided more than 40 companies through this turbulent process. From strategic planning to due diligence preparation to post-sale integration, one thing is certain, no two sales are alike.
Named one of the nation’s Top 50 PE Firms in the Middle Market for seven consecutive years, Boyne relies on a hard-earned reputation of value creation for its portfolio companies – from building the business to exiting it. Our operational support for portfolio companies goes beyond just funding capabilities, and its been proven to give portfolio companies the edge they need in today’s hyper-competitive marketplace. Moreover, our portfolio partners also benefit from the support and expertise of our partner consultants who offer advanced solutions in areas ranging from accounting to operations to legal to compliance.
The intricacies of a sale require the deep knowledge of experienced tax professionals, such as the team at Crowe LLP, who provide valuable insight in the article below. As Crowe pointed out, both the buyer and seller benefit from due diligence. If you are selling your business and you have not yet addressed their five tax issues, there’s no better time than the present to start.
Thinking of selling your business?
Consider these five tax items when preparing your business for a sale.
Courtesy of Joseph A. Quinn, CPA, and Daniel J. Cameron, CPA
When working with owners who are considering selling their business, it is a best practice for a company to first perform sell-side tax due diligence so owners have a better understanding of any potential tax issues that might exist. Getting in front of any potential tax issues can help the sale process go more smoothly, and it can limit the number of surprises that may arise when the buyer’s advisers perform buy-side tax due diligence.
Five areas we recommend focusing on when performing sell-side tax diligence are:
- Accounting methods.
Review the accounting methods being used on the company’s tax returns and confirm that these methods are permissible. If a company is using an improper method of accounting, the issue will need to be corrected by filing Form 3115, “Change in Accounting Method,” which shifts the company to the proper method of accounting. The filing for Form 3115 also provides IRS audit protection for prior years when an improper method was being used. - State filing footprint.
Analyze the company’s geographic activity to determine state income tax nexus. A few questions to ask include:
• In which states does the company have sales, payroll, and property?
• Where are employees traveling to, and what business-related activities are taking place? Some common employee activities include performing services, solicitating sales, and making repairs.
• Are similar business activities occurring in other states?It is common for a company to have income or sales tax nexus in various states, but to have not filed state income tax or sales tax returns in each state. In such cases, the company should estimate the potential tax exposure and evaluate whether it may make sense to enter into voluntary disclosure agreements with certain states. A voluntary disclosure agreement is a mechanism that allows a taxpayer to clean up historic tax issues. The benefit of these arrangements is that states will cap the number of years that they will go back and assess tax and typically waive penalties for those years.
- Invalid Selection.
If a company is an S corporation, ensure that it has a valid S election. Sometimes S corporations will have an invalid election that requires correction with the IRS. Companies should also strengthen their documentation principles if they are unable to properly document their valid S elections. - Independent contractors.
Confirm that the company is classifying employees and independent contractors correctly from a tax perspective. It’s not uncommon for full-time employees to be mistakenly treated as independent contractors and vice versa. To ensure that employees are properly classified, the company should work through the self-assessments provided by the IRS. If employees are in fact found to be misclassified, the company will need to assess any exposure for payroll taxes, withholding, and penalties. - Tax deferral and rollover equity.
Consider the benefit that may be available to a seller choosing to rollover a portion of its equity. S corporations and their shareholders often restructure prior to a sale so the seller can recognize gain and pay taxes only on the portion of the business that it sold, deferring the gain and tax payment on their rolled equity.
As the professionals at Crowe LLP make clear, doing your sell-side due diligence will lead to a smoother transaction when the time comes to sell your business. As our previous article on preparing to sell your business points out, the more you understand why you are selling, what condition your company is in, potential pitfalls and what you plan to do post-sale, the better prepared you will be to create a successful outcome. Boyne Capital has counseled dozens of companies on exit preparations, at times calling on the resources of expert partners like Crowe LLP to help provide a complete analysis of their options. Give Boyne Capital a call to help you evaluate where you are and where you should be going.
Crowe LLP is a public accounting, consulting, and technology firm with offices around the world. Crowe uses its deep industry expertise to provide audit services to public and private entities. The firm and its subsidiaries help clients make smart decisions that lead to lasting value through its tax, advisory and consulting services.
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