Due Diligence for Sellers (Part 2)

Seller's Due Diligence Checklist Part 1When selling your business, the biggest impact on how much money you’ll walk away with is the taxes you’ll have to pay on the proceeds of the sale. That’s why it is imperative that every decision you make throughout the process of selling your company be made with an eye toward the tax consequences.

The good news is that, in certain situations, you may even be able to structure the sale as a tax-free reorganization. This can occur if, instead of cash or deferred payments, you receive nothing but stock in the acquiring corporation. If the deal is structured in this way you may owe no taxes unless and until you sell the shares you have acquired.

The risk is having those shares decline in value between the time you receive them and the time you sell them. This places even more importance on doing your due diligence to investigate and evaluate the financial stability and management ability of the buyer.

If you wish to avoid immediate taxes by selling your business in exchange for stock in the acquiring company, some of the key issues you will want to resolve before striking a deal to sell are:

Raise your selling price to reflect the increased financial risk you will assume in receiving stock instead of cash or more liquid assets.

  • Be sure you will be able to sell the acquired stock quickly – if so desired – in accordance with securities laws and tax rules.
  • Assess the buyer’s financial position and stability by examining recent operating results, credit reports, financial statements, revenue trends, and financial ratios.
  • Evaluate the financial health of the acquiring company’s major customers. Will they continue to be a good source of revenue?
  • Set a firm timetable for completing the transaction – you don’t want to be “left hanging” while your future stock declines in value.
  • Gain an understanding of the buyer’s plans for your business. Will they assimilate it into existing operations? Run it as a separate operation? Invest in growth?
  • Examine public records to uncover any current or pending litigation against the buyer that may affect their operations and future profitability.
  • Negotiate a consulting contract for yourself and your key managers. This will provide some cash flow while also giving you the chance to influence how your business will be managed, helping to minimize your financial risk.
  • Make sure you have a full understanding of the tax implications of the all-stock deal, and that it is properly structured to deliver the deferred tax benefits you expect. Engage an experienced CPA to help with this.
  • Don’t ignore state and local tax issues, which may be different from federal regulations. Things can get even more complicated if your company does business in more than one state.

Structuring the sale of your business as a tax-free reorganization can deliver significant benefits if the deal is properly organized and the timing is right. But doing your homework up front is essential in order to minimize your financial risk and maximize the benefits you’ll enjoy. Find a trusted advisor to help you conduct your due diligence.


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