GRANT THORNTON: Considering selling your business? It pays to plan ahead.

Read the original article here If you are selling your business, your goals should dictate your approach to everything from corporate structure to tax planning. There are many ways to structure M&A transactions, each with different tax implications, so the decision of how to sell is just as important as what to sell.

Engage in business planning before negotiations go too far

There are any number of reasons to sell a business, whether personal, strategic or commercial. Understanding what is important to you and how the sale fits into your overarching strategy and objectives is an essential first step in the planning process. Does the business have special meaning to you? For example, is it a family business? Do you consider it to be a strategic asset? Although basic, these questions will influence the entire transaction, and help you optimize after-tax returns. Those tax implications can then inform your decisions concerning the pricing, conditions, schedule, and structure of the deal. In certain circumstances, the right planning can impact the net return on a sale by 10-15% — a significant margin. It is also important to understand that business planning should take place before the negotiations become too advanced. Once you’ve signed a letter of intent, it may be too late to make key decisions on the transaction which will maximize tax efficiencies on the overall sale. Once negotiations are underway, you may be surprised at how quickly they unfold – the process often takes less than two months. This does not leave much time for corporate planning, so there is a balance to strike as a seller. While you don’t want tax planning to drive you’re planning as a vendor and other strategic considerations, it is still a good idea to be proactive, and not be inhibited from taking decisive action for tax reasons later on. We recommend that you start with a clear outline of your corporate objectives and optimize tax results accordingly. While buying takes months, selling takes years. If you are the seller, you should think about the possibility of M&A at least three years in advance because this will help determine how your business grows. In contrast, buyers are usually responding to market dynamics, although they will also have long-term objectives of their own.

Understand the buyer’s motivations

As a seller, you should have a strong understanding of the value of your business, your role in the market, and what intangible factors may motivate prospective buyers. For example, some buyers are motivated by competitive factors, and will place a premium on their competitive position. These factors are quantifiable and should be well understood before the terms of the transaction are settled. Although buyers respond to market opportunities, they also engage in long-term planning. A significant part of their strategic plan may include buying businesses to achieve their objectives. So, this is not usually a spontaneous decision, as the buyer will be identifying targets in advance. The buyer’s strategic motivations will usually include one, or more, of the following:

1. The targeted business is in the same sector, perhaps as a key supplier;
2. The targeted activities are innovative and show significant promise;
3. The acquisition may lead to economies of scale and increased profitability;
4. There are competitive advantages to be gained in a geographic area; and
5. The acquisition is done sooner than intended due to intense M&A activity in a sector or a geographic area.

Another important consideration in a buyer’s decision to proceed with the acquisition is whether they are capable of assimilating the target business. Although the business may seem attractive for strategic reasons, the acquisition is only advisable if the buyer has the capacity to see it through. Otherwise, they risk becoming overwhelmed if their new, sudden growth isn’t structured properly. While this may seem counter-intuitive if you are the seller you shouldn’t focus on the transaction structure until you fully understand the buyer’s motivations. This is because it’s difficult to negotiate without compromising the value of what you’re trying to sell. So, you have better odds of maximizing your position once you truly understand what the buyer wants.

What does the transaction look like?

Once you decide to sell your business, you should consider the after-tax return on proceeds. The number of vendors may have an impact on the capital gains exemptions that are available. Further, a tax deferral may be available depending on the nature of the proceeds. The reason for this deferral is to match tax obligations with cash flows and ensure you don’t incur unexpected tax liabilities while holding relatively illiquid assets. As well, to the extent the sale proceeds include a contingent or earn-out component, which allows the seller to participate in the future growth of the company, such a component can be taxed as a capital gain or regular income.  The outcome depends on how it is earned or realized. Usually, it is more advantageous for a seller to sell an equity interest and for a buyer to buy assets. For each side, this choice comes with certain tax advantages. Although this is the basic dynamic at play in M&A, transactions are becoming increasingly complex in today’s competitive environment. In fact, the question of whether a sale involves equity or assets is sometimes a hard one to answer, and your professional tax advisor may help you in making this choice and in optimizing the result. The priority for your Grant Thornton tax advisor is to help you reach your long-term financial goals, at every step of the corporate journey. When done in advance, tax planning can both support and guide your decisions in a way that will maximize returns and help you avoid unexpected pitfalls. For more information, contact us.]]>