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Capital Ideas for Middle Market Businesses

Welcome to this issue of Capital Ideas, our newsletter dedicated to business selling, business buying and financial resources for mid-market companies.


Taxes—The Key to Keeping More In The Sale of Your Business

Being Ready vs. Being Prepared

By David DuWaldt, Managing Director
Los Angeles Office
Corporate Finance Associates

Saving Taxes"How much is my business worth" is a question we often hear from owners considering the sale of their business. But a better question might be, "How much will I get to keep after my business is sold"? One of the keys to unlocking the answer to this question involves taxes and how large a check you write to Uncle Sam will ultimately be determined by the structure of the transaction. However, structuring a transaction so that the seller and buyer are both afforded tax benefits is not quite as simple as it sounds.

With every sale of a business enterprise there will be tax implications. The structure of a sales transaction and the underlying facts and circumstances will determine the tax results. The scope of this article is limited to federal income taxation, including the tax imposed on capital gains. There are several other tax issues that need to be addressed in a business sale including estate, gift, state and local taxes.

Asset Versus Stock Sale

Absent other issues such as the transfer of permits, licenses, leases, and certain intellectual property rights, which might only be accomplished through a stock sale transaction, buyers will generally be motivated to purchase assets rather than stock of a corporation. Many assets, including goodwill, can be amortized, depreciated or subject to depletion, which can prove to be advantageous to a buyer when comparing such a structure to the purchase of corporate stock. Except for the tax election provided under IRC Section 338(h)(10), which basically treats a stock purchase as an asset acquisition, a buyer cannot amortize or depreciate corporate stock...Read more »


Feature Acquisition

tombstone

Situation: The Clifford D. Fite Company was founded approximately 75 years ago by its namesake. Mr. Fite was a bachelor, which meant ownership passed to his nieces and nephews, none of whom were active in the business. The third generation owners were 2nd generation absentee owners and none lived near the business. Furthermore, the cigarette distribution business was rapidly changing and consolidating. Margins were squeezed, profits shrunk, and business got very difficult for a local distributor in an industry ruled by billion dollar companies. The Company needed a more hands-on ownership group, needed to modernize its facility, broaden its product offerings, and expand its trade area. The shareholders were uncertain how best to continue to develop their company.

Solution: Through a referral from its CPA firm, the Fite Company contacted CFA-MidWest to discuss plans to revitalize the business and eventually sell the Company. CFA assisted the shareholders with an analysis of the Company and the areas where improvements were required to help facilitate a sale. The management team was strengthened, old equipment was replaced, and profitable growth was emphasized. All the while, CFA was working to find a suitable strategic buyer to acquire the business.

Results: After meeting with several prospective strategic acquirers, CFA and the shareholders determined Imperial Trading Company, a mid-major in the industry, was the right partner. After a short negotiation, the transaction was concluded with Imperial, who plans to invest a significant amount of capital to improve the Fite Company's infrastructure and equipment. The shareholders received a fair price for their business while selling to a new owner who would retain the entire workforce and plans to rapidly grow the business.


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