Few events in business life rival the challenge and reward of buying or selling a business. Following are some practical observations about the legal landscape that every businessperson should know before venturing, as either buyer or seller, into this exciting, but often unfamiliar, territory. Below is one of the first things that every businessperson should know:
1. First, Run the Numbers.
Speaking of taxes, because the tax bites of the two different structures vary widely — an asset sale by a C corporation with its potential “double tax” operating as a confiscatory penalty, versus a stock sale yielding only a single tax — it becomes crucial to run the numbers early on. At the outset a business owner should get written confirmation (pro formas) from the company’s accountant containing after-tax projections.
For example, the parties may (under tax laws) elect to treat a stock sale as an asset sale for tax purposes, with various ramifications. For another example, it has become increasingly common for sellers to receive a substantial part (say 30% or 40%) of the sale consideration in deferred post-closing payments tied to employment. This “golden handcuffs” structure, however, has a hidden trap: under the tax laws, even though nominally received in exchange for a capital asset (the stock or assets), income tied to continued employment is deemed ordinary income, exposing those payments to much more than the tax bite of capital gains.
For all these reasons and more, one should have the post-tax numbers nailed down in writing to the seller’s satisfaction by seller’s CPA, before approving a term sheet or letter of intent.