Exit Strategist - Tax Tips on a C Corp Asset Sale

THE EXIT STRATEGIST

Tax Tips on a C Corp Asset Sale

First, unless you are planning on going public or have hundreds of stockholders do not form a C Corp to begin with. Use an S Corp or an LLC. If you currently are a C Corp ask your attorney or tax advisor about converting to an S Corp. If you sell your company within a 10 year period of converting to an S Corp the sale can be taxed as if you were still a C Corp.

Here is what happens when there is an asset sale of a C Corp. The assets that are sold are compared to their depreciated basis and the difference is treated as ordinary income to the C Corp. Any good will is a 100% gain and again is treated as ordinary income. This new found income drives up your corporate tax rate, often to the maximum rate of around 34%. You are not done yet. The corporation pays this tax bill and then there is a distribution of the remaining funds to the shareholders. They are taxed a second time at their long term capital gains rate.

Compare this to a C Corp stock sale. The stock is sold and there is no tax to the corporation. The distribution is made to the shareholders and they pay only their long term capital gain on the change in value over their basis. The difference can be hundreds of thousands of dollars.

Secondly, keep all assets that may appreciate in value outside the C Corp and in an LLC. Your real estate, patents, intellectual property, etc. should be held in a pass through entity so you avoid the potential high C Corp corporate tax rate and the double taxation if you do an asset sale.

Let's say that you are a C Corp and the buyer refuses to do a stock sale. If you can get the buyer to move as much of the transaction value to a covenant not to compete, you will be much better off. That will be taxed to you personally at the long term capital gains rate and not the corporate tax rate and the gain can be spread out over the non-compete period.

Another approach you can use is "Personal Good Will". This is where the seller's reputation, expertise, and relationships are in effect separated from the assets of the company and account for as much of the good will value as possible from the business. So let's say that the company sells for $8 million dollars and the amount allocated to the hard assets is $6 million. That leaves $2 million that can be classified as good will. If that good will is assigned to the C Corp, it will be taxed at the 34% rate and then taxed again when it is distributed to the shareholders at 15%.

If you can move that amount to personal goodwill for the owner, it is paid directly to him and he gets taxed at the 15% rate only. The calculation looks like this: If the good will is $2 million and is allocated to the C Corp. They pay $680,000 in corporate income taxes. The $1,320,000 remaining gets distributed to the shareholders and an additional 15% tax is paid or $198,000 for a total tax on that $2 million of $878,000. Moving it all to personal goodwill results in a total tax on that $2 million of $300,000, a savings of $578,000. This approach was pioneered in a classic IRS case called the Martin Ice Cream Case.

There is a built in bias on the part of buyers with the advice of their attorneys to avoid doing stock sales because you buy everything including any hidden liabilities. You as the seller want to convince the buyer to do a stock sale by demonstrating that there are no hidden liabilities. Another argument you can use is that most contracts are not assignable without the consent of the other party. In an asset sale it could be problematic to get assignments of a large quantity of contracts. An example is if your company is in a favorable long-term property lease the landlord will never agree to an assignment of that lease. If you have a long-term contract with a government entity, a change in ownership can trigger a contract end. In a stock sale these are not issues.

There are many variables in a business sale negotiation. Price, Cash at close, Stock versus Asset Sale, and allocation of purchase price. The IRS does not allow the buyer's allocation of purchase price to be different than the seller's. It also must be noted that from a tax standpoint, something favorable for the seller is correspondingly less favorable for the buyer. An experienced buyer will structure the deal in the most favorable way for himself. Sellers must get good advisors to help them negotiate to achieve the maximum after tax proceeds.

Thanks for reading! If you know someone who could benefit from this, feel free to forward it to them! Not a subscriber yet? Like what you've read? Sign up to get future issues delivered straight to you: SUBSCRIBE

Until next time!

Dave Kauppi is the author of "Selling Your Software Company - an Insider's Guide to Achieving Strategic Value, editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and President of MidMarket Capital, Inc. MMC is a private investment banking and business broker firm specializing in providing corporate finance and business intermediary services to entrepreneurs and middle market corporate clients in a variety of industries. The firm counsels clients in the areas of merger and acquisition and divestitures, achieving strategic value, deal structure and terms, competitive negotiations, and Letter of Intent Consulting. Dave is a Certified Business Intermediary (CBI), is a registered financial services advisor representative and securities agent with a Series 63 license. Dave graduated with a degree in finance from the Wharton School of Business, University of Pennsylvania. For more information or a free consultation please contact Dave Kauppi at (269)231-5772, email Dave Kauppi or visit our Web page MidMarket CapitalClick Here For Our New Book on Amazon

 
 
 
 
DaveKauppi
President
MidMarket Capital
Technology Focused Investment Banking
davekauppi@midmarkcap.com
Direct (269) 231-5772

Check Out Our New Book on Amazon

Selling your Software Company - An Insider's Guide to Achieving Strategic Value

46102 Royal Avenue
Grand Beach Michigan 49117
USA


Unsubscribe   |   Change Subscriber Options

Older messages

Selling Your Business - What Would Sam Zell Do?

Sunday, June 16, 2024

THE EXIT STRATEGIST Selling Your Business - What Would Sam Zell Do? If you were thinking of making an investment it might be a good idea to watch how Warren Buffet does it. If you are going to sell

Business Sellers - Beware of the C Corp Asset Sale

Monday, June 3, 2024

THE EXIT STRATEGIST Business Sellers - Beware of the C Corp Asset Sale We recently completed a Merger and Acquisition engagement to sell our client to a large publicly traded company. Our client had

SELLING YOUR BUSINESS - THE ELEVENTH HOUR CONTRACT CHANGE

Sunday, May 5, 2024

THE EXIT STRATEGIST SELLING YOUR BUSINESS - THE ELEVENTH HOUR CONTRACT CHANGE The next line could be, "Will it Derail Your Sale?" We have seen it go both ways, unfortunately. If a deal does

Selling Your Business - Why Use an M&A Advisor

Sunday, April 14, 2024

THE EXIT STRATEGIST Selling Your Business - Why Use an M&A Advisor Perhaps the most important business transaction you will ever pursue is the sale of your business. Many business owners attempt to

Reduce the Buyer's Time to Market and Increase Your Business Selling Price (a short video)

Sunday, March 31, 2024

THE EXIT STRATEGIST Reduce the Buyer's Time to Market and Increase Your Business Selling Price (a short video) Click Here to Watch Our Short Video The Key to driving strategic value in the sale of

You Might Also Like

Is Your Business Making Money with SEO?

Saturday, October 5, 2024

SEO Tip #64 ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

The Best Personal Branding Advice On The Internet

Saturday, October 5, 2024

It took me 50000 posts to learn these ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

4 out of 800 Sales Execs Raised Their Hand

Saturday, October 5, 2024

A New Low in SaaS Malaise? To view this email as a web page, click here saastr daily newsletter 4 out of 800 Sales Execs Raised Their Hand. A New Low in SaaS Malaise? By Jason Lemkin Thursday, October

Should you focus your marketing on Gen Z?

Saturday, October 5, 2024

Gen Z is a purchasing powerhouse, but if you want to get through to them, you may need to learn how to speak their language. And I mean that both literally and figuratively. Born between the mid-1990s

🦸🏻#2: Your Go-To Vocabulary to Navigate the World of AI Agents and Workflows

Saturday, October 5, 2024

October 05, 2024 | Read Online 🦸🏻#2: Your Go-To Vocabulary to Navigate the World of AI Agents and Workflows like comment Was this email forwarded to you? Sign up now to receive it in your inbox Intro

Inside the rise of evergreen funds

Saturday, October 5, 2024

Also: Q3 data is here; Our US presidential election guide; We've expanded our suite of private capital barometers; Recapping September performance... Don't want to receive these emails? Manage

'You Have To Have a Level of Intensity in Everything You Do'

Saturday, October 5, 2024

We spoke to IBM Senior Vice President of Software and Chief Commercial Officer Rob Thomas about navigating difficult career choices, good versus bad risk, and appropriate reliance on data in decision-

A/B test. 2 headlines. 40% difference.

Saturday, October 5, 2024

Every business - big or small - needs an e-sign tool in their stack. But they cost so much. Get this lifetime deal on the best Docusign / PandaDoc Alternative (https://www.rockethub.com/deal/flexisign/

Dethroned After 61 Weeks At Number One

Friday, October 4, 2024

Shein Sours A Bit, A Part Of A Larger Narrative... View this email in your browser A New No. 1 On The DTC Power List (No. 1009). The most recent member letter was read by 61.8% of subscribers. The top

Uptober delayed? Telegram maybe not so private after all

Friday, October 4, 2024

PlayToEarn Newsletter #247 - Your weekly web3 gaming news ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌