Navigating Tax and Legal Hurdles When Selling Your Business: A CFO's Insight

This article is the sixth in a nine-part series, "CFO Network's Nine Point Plan to Sell Your Business." Each article will focus on an important facet of preparing to sell your business. 

Selling your business is a monumental decision involving numerous complexities beyond finding the right buyer. Properly addressing these aspects is crucial for a smooth transition and maximizing the value you receive. The purpose of this article is to identify some of the issues you'll face and not meant to be tax or legal advice.



Navigating the sale of your business with professional guidance is safe. Having a tax CPA and an attorney who understands your business and the specifics of your industry can make a significant difference.

Tax CPA: A tax CPA can help you navigate the complex tax landscape, ensuring you maximize your after-tax proceeds. They can assist with tax planning strategies, such as installment sales, and advise on the best structure for the sale to minimize your tax liability.

Attorney: An attorney specializing in business sales will ensure that all legal aspects of the transaction are handled correctly. From drafting and reviewing contracts to ensuring compliance with state and federal regulations, an experienced attorney is indispensable. 

Common Tax Issues When Selling Your Business

Capital Gains Tax:

If you've owned your business for over a year, you'll typically benefit from lower long-term capital gains tax rates. Less than a year? Expect to pay higher short-term rates. Both federal and state governments will want their share regardless of your situation.

Allocation of Purchase Price:

How the sale is structured—whether as an asset sale or a stock sale—affects how the purchase price is allocated among different assets, influencing your tax liabilities. Asset sales often result in higher seller taxes but can be advantageous for buyers.

Depreciation Recapture:

If you sell assets that have been depreciated, you might face depreciation recapture taxes, which are taxed as ordinary income. This can significantly impact your net proceeds.

Installment Sales:

Selling your business via an installment sale can spread your tax liability over several years rather than incurring it all in one year. However, this approach requires careful planning and negotiation.

Common Legal Issues When Selling Your Business

Due Diligence:

Expect the buyer to conduct thorough due diligence, examining your financial statements, contracts, intellectual property, and more. Ensure all material information is disclosed to avoid potential legal disputes post-sale.

Contractual Obligations:

Review all existing contracts with suppliers, customers, and employees to ensure they are transferable or address any necessary terminations or renegotiations. Buyers may require non-compete clauses to prevent you from starting a competing business immediately after the sale.

Employee Considerations:

Ensure compliance with labor laws and consider providing severance packages where applicable. Clarify how employee benefits and pensions will be handled to avoid legal complications.

Intellectual Property:

Ensure all intellectual property (IP) is correctly documented and transferred. This includes trademarks, patents, copyrights, and trade secrets. 

Conclusion

Selling your business is a complex process fraught with tax and legal challenges. Understanding and proactively addressing common issues can ensure a smoother, more profitable transition. Remember, engaging a knowledgeable tax CPA and attorney is not just advisable; it's essential for protecting your interests and maximizing the value of your business sale.



You've worked hard to build your business—ensure that the sale process honors that effort by being well-prepared and well-advised.