Fall 2014 issue of Horizons

FEATURE

can be particularly advantageous if the company’s value is expected to appreciate. Sophisticated strategies using trusts and family limited partnerships can help to maximize the estate tax benefits derived from these types of transfers.

In contrast, a sale of C Corporation stock will only be taxed once at the shareholder level. It is important to note, however, that buyers often prefer asset acquisitions to purchases of stock because it subjects them to less risk after the transaction from pre-existing liabilities, conditions, etc. If the business is organized as a flow-through entity (i.e., an S Corporation), most prefer to sell business assets in lieu of company stock. S Corporations are usually subject to only one level of tax, which is at the shareholder level. In most cases, this can produce significant tax savings versus C Corporation structures by eliminating the corporation level tax. Therefore, if the business is organized as a C Corporation and the sale horizon is still some years from now, it might be worth considering converting from a C Corporation to an S Corporation. It should be noted that any appreciated property transferred at the time of the C to S conversion will be subject to the built-in-gains tax if sold within 10 years of the date of transfer (which preserves some of the entity level tax). Any appreciation on company assets that occurs after the conversion escapes the corporate level tax. Other considerations may include deferral of sale proceeds (and gains) via an installment sale structure. Your company leadership will also want to consider opportunities to reduce future estate tax liabilities through planning in advance and in conjunction with a contemplated sale. Current rules allow each taxpayer to gift, generally tax free, up to $14,000 per year per recipient (the “Annual Exclusion”) and $5,340,000 over the taxpayer’s lifetime (the “Lifetime Exemption”). Future appreciation on gifted assets and proceeds from the future sale of such assets usually escape taxation as part of the estate of their original owner. Business owners often transfer company stock, especially nonvoting stock, utilizing these rules, which

Clean Up Your Business’ Financial Records

If your business is already receiving an audit or review, then you have demonstrated a commitment to enhancing the perceived integrity of your business’ financial records. This is a great step forward in being able to withstand the scrutiny of a prospective buyer’s financial due diligence. Having an audit or review sends a signal to a prospective buyer that your company is keeping orderly financial records and supporting documents (e.g., invoices, receipts, and account statements), the business’ accounting methods are consistent from month-to-month and year-to-year, and that management can articulate why the business’ accounting methods and estimates are reasonable. Having audited or reviewed statements is also a plus from a valuation perspective as anecdotal evidence suggests that a business may lose a half turn to a full turn of EBITDA valuation if a financial statement audit is not available. However, having financial statements audited or reviewed by a third party is not the only step to consider when cleaning up your business’ financial records. Founder/owner-run businesses often contain some level of discretionary, non-operational expenses. While there are ways in which a prospective buyer can get comfortable that certain of these amounts are truly discretionary or non-operational in nature, there are often many questionable amounts for which a prospective buyer may not give you full value.

Examples include higher-than-market wages paid to family members, meals and

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