Are you preparing to sell your middle market business through M&A?
You're likely already aware that tax planning is a critical component of a successful exit planning. And while the M&A process can be complex and overwhelming, taking a strategic approach to tax planning can help you maximize your after-tax proceeds and minimize your tax liability.
Listen closely as we break down 5 powerful tax planning strategies that will help you achieve a profitable exit.
Understand the tax implications of different deal ORIGINATION structures
The tax implications of different deal structures, such as asset sales versus stock sales, can have a significant impact on the after-tax proceeds of the sale. In an asset sale, the seller retains ownership of the business entity while selling its assets.
In a stock sale, the buyer purchases the entire business entity, including all of its assets and liabilities. Each structure has its own tax implications, so it's important to work with a tax advisor to understand the potential tax implications of each structure and determine which one is best for your situation.
Consider utilizing a Section 338(h)(10) election
A Section 338(h)(10) election allows a buyer to treat the acquisition of a target corporation's stock as an asset acquisition for tax purposes. This can be beneficial for the buyer, as it allows them to receive a stepped-up basis in the target corporation's assets, which can reduce future tax liabilities.
For the seller, this election can result in a higher purchase price, as the buyer is able to realize tax savings.
Plan ahead for the sale of any appreciated assets
If you plan to sell appreciated assets, such as real estate or securities, as part of the M&A transaction, it's important to plan ahead to minimize your tax liability.
One strategy is to utilize a charitable remainder trust (CRT), which allows you to donate the appreciated assets to a charitable trust and receive a tax deduction for the charitable contribution. The CRT can then sell the assets tax-free and provide you with a stream of income for a specified period of time.
Consider utilizing an installment sale
An installment sale allows the seller to defer the recognition of a portion of the gain on the sale of the business over a period of time, rather than recognizing the entire gain in the year of sale. This can be beneficial for sellers who are looking to spread out their tax liability over a longer period of time.
Take advantage of the qualified small business stock (QSBS) exclusion
The QSBS exclusion allows taxpayers to exclude up to 100% of the gain on the sale of qualified small business stock from federal income tax. To qualify, the stock must be held for at least five years and meet certain other requirements.
This exclusion can be a powerful tool for middle market business owners looking to minimize their tax liability on the sale of their business.
Maximizing your after-tax proceeds and minimizing your tax liability is critical for achieving a successful exit from your middle market business.
By understanding the tax implications of different deal structures, planning ahead for the sale of appreciated assets, utilizing installment sales and the QSBS exclusion, and working with a qualified tax advisor, you can take control of your tax situation and achieve a profitable exit.
Remember, every situation is unique, and with the right approach and the right team in place, you’ll be able to achieve a successful exit from your business.
