Higher tax rates that went into effect this year have further raised the stakes for business owners anticipating a third-party sale, as failure to plan for those impacts could surprise sellers by leaving them with significantly less in take-home pay than anticipated, according to North Bay experts in accounting and business law.
While experts in business mergers in acquisitions have long urged owners to take those tax impacts into account when planning a sale, a combined state and federal rate that currently tops out at 39.6 percent for non-investment income has made that planning even more important, they said. If included as part of a holistic approach to a sale, sellers can stand to walk away with more income and with a clearer picture of the takeaway pay that for some will be a core source of wealth that supports them into retirement.
[caption id="attachment_41492" align="alignleft" width="176"] Jay Silverstein[/caption]
“More often than I would like, a client decides that they are in fact going to sell their business and enter into a letter of intent. They decide the price is great, but they haven’t actually looked at it from a sale structure standpoint,” said Jay Silverstein, wealth services partner at the Santa Rosa office of the accounting firm Moss Adams. “They can end up surprised when they actually realize what they really get after tax."
While each case varies, business owners are often less sophisticated than buyers when it comes to understanding the nuances of a sale. The decision to sell a business to a third party can be an emotional one, and simply finding an interested buyer is a significant benchmark in itself, he said.
Unfamiliar with the way sales may be treated for tax purposes, some sellers bring in tax professionals only after signing a letter of intent that outlines the basic mechanism of the ownership transfer. Even if it is found at that point that the seller could have avoided or negotiated around a significant tax burden, some are reluctant to backpedal against the immensity of the acquisition process.
“It’s like buying a car – the salesmen gets you in the car, and you’re hooked,” Mr. Silverstein said. “Once you initiate the process, a buyer can feel hooked.”
Instead, succession specialists said that sellers should do that planning early, including tax considerations as part of an addendum in a letter of intent and making those factors an integral part of discussions.
“Everybody looks at the top line. I’ve always been interested in what I call ‘The Bottom Line,’ – what they actually take home,” Mr. Silverstein said.