State and local tax issues when buying or selling a business

You’ve always dreamed of owning a business. Now you’ve found the perfect one to purchase. You ask all the questions you can think of, come to an agreement on price and now you’re ready to go, right?

One major thing that sometimes gets overlooked is something called “successor liability.” This is the idea that when you buy a business, or the assets of a business, you generally also inherit all the liabilities associated with that business or the assets.

Some of these liabilities are pretty easy to figure out, but others may be hidden and difficult to know about or quantify. For instance, you can be audited for periods before your ownership and you can be assessed for sales or other taxes owed by the last owner.

Don’t believe us? Here are some common examples of successor liability discovered after the purchase of a business:

So what are some issues that could create tax exposures for you and your new company?

  • Company had the duty to file but failed to do so
  • The return was filed, but tax was not remitted
  • Company failed to pay use tax
  • Company did not have all the correct exemption certificates
  • Local taxes were ignored

So what can you do to reduce your risk when purchasing a business? Perform the proper due diligence. Due diligence can take a number of different forms, but generally includes reviews of the following:

  • Is the seller filing in the states where it has a duty to?
  • Are the returns accurately and timely?
  • Are taxability decisions correct?
  • Is the proper tax rate being applied?
  • Are exemption certificates accurate and up-to-date?
  • Has the seller been audited or received inquiries from any state?

Hiring a professional to assist you with a due diligence study can help you properly assess the potential liabilities and arrive at a more informed decision. Plus, it will hopefully save you some headaches later on.

But due diligence doesn’t just apply to buying a business. Let’s say you’ve finally made it to retirement and want to sell your business. Performing a due diligence study can help you be sure you have handled all these tax issues correctly and nothing will pop up unexpectedly that may scare away a potential buyer.

No matter what side you’re on, a little additional work upfront could potentially prevent some difficult, timely and expensive mistakes later.

Inspiring Confidence with Financial Statements!

Yes, you read that title right. Financial statements do a lot of things (we’re hoping you’ve learned that from this blog). But can they inspire confidence? Absolutely!

You may be thinking that financial statements are just numbers and nothing more. In a literal sense, you’re right — financial statements are a set of numbers. But when you understand them, they tell a story of where your business has been and where it’s going.

This story has many important tales to tell, and it is important to pay attention as your business grows and changes. It can also give you warning signs of disaster, and can help you stay on track to avoid this.

While working in the mergers & acquisitions department, I’ve come to understand the value of financial statements and that they can really instill confidence. Let me tell you a little secret friends: buyers WANT to feel confident when they write a check for millions, and financials play a big role in the confidence they feel.

A healthy bottom line gives buyers the warm fuzzies about their future with your company, but what else do financial statements provide?

  • Cleanliness | You have to have cleaned up financials before you decide to sell your business. A myriad of adjustments to wade through can raise some serious red flags and, frankly, make people wonder what’s really going on behind the scenes.
  • Timeliness | Being casually late works at times, but not all the time. When July’s financials are not ready to review until October, this gives some very negative signals to buyers. Its shows missed opportunities and the inability to react to the market … both of which will keep your buyers up at night.
  • Processes and procedures | No one wants to buy a circus, so make sure you have processes and procedures in place to get things done. If things are three to four months late, it’s an indication that maybe your buyer should run or reduce the offer.

And in case you’re wondering, we’re not talking a one-time thing. The sales cycle for business can take anywhere from 6-12 months, so the buyer will get a chance to really see how things are done and make assessments along the way. It’s best to always have your best foot forward so your buyers get the true picture of your business.

At the end of the day, your financial statements should help you run or sell your business, not hinder you. Let your financial statements give you confidence and tell the story of your hard work and success by making sure they’re up-to-date, cleaned up and timely.

Shameless plug: If you don’t understand your financial statements and what they mean … or have no idea what this blog is talking about, we can help.

YOUR END GAME: The Importance of Sales Tax

One thing we find is that businesses are really excited to start. You have great ideas and you’re ready to make your dream a reality and introduce a product that will change the world … or at least the way we’ve always done something.

What few businesses add to their mounting to do lists when they start is to think about how they’ll END. Your end game is critically important to consider at the beginning because it helps you chart your course.

Here are a few questions you should be asking right from the beginning:

  • What is your business goal?
  • How do you plan to grow your business?
  • What happens when it comes time for you to exit your business? Who takes over?
  • How do YOU want to exit your business?
    • Merger?
    • Acquisition?
    • Sale?
    • Retirement?

These are just the beginning of numerous questions you can ask. And these don’t take into account a critical component to your end game: SALES TAX. Yes, the current sales tax laws at the time of a buy/sell transaction have an implication on your business. And for you serial entrepreneurs out there, it also has an impact on businesses you buy.

Buyers need to be alert to unpaid or unknown taxes in advance. Otherwise you may be in for a world of hurt when you acquire hidden liabilities. Sellers have to demonstrate you have addressed things like sales and use tax, nexus and payroll tax … to name a few. The way these items are handled can impact the purchase price and what can be done to successfully close the deal.

Now before you freak out, RELAX. We can help. Join us as we discuss how sales tax laws play into business transactions and things you should watch for. You can find us in Mankato on August 2, Sioux Falls on August 3 and Fargo on August 4. We’ll even give you lunch.

P.S. Check out these different considerations when talking about Your End Game. Just make sure you start talking about it early.

 

 

Business Equipment: Lease v. Buy

One of the things you may not have considered as a business owner are your equipment needs. Will you buy it outright? Or lease it? It’s a question you’ll face and an answer that’s not easy (did you expect anything less?).

Here’s the short answer: It depends on your situation.

Here’s the slightly longer one: Each business is unique and the decision to buy or lease business equipment must be made on a case-by-case basis. There are pros and cons to each one. Read on for more details.

To lease or not to lease?
Leasing can be a good option for business owners who have limited capital or need equipment that must be updated every few years. Leasing preserves capital and provides flexibility. However, it may cost you more in the long run.

Advantages:

  • Less initial expense. This is the primary advantage as it allows you to acquire assets with minimal initial expense.
  • Down payment is either very low or non-existent.
  • Payments may be a deducted as a business expense. Just make sure you check with your tax accountant on the appropriate lease to obtain.
  • Flexible terms as leases are usually easier to obtain and have more flexible terms than loans. This can be significant if you have bad credit or need to negotiate a longer payment plan to lower your costs.
  • Easier to upgrade equipment as leases allow you to address the problem of equipment no longer being used or useful. You are free to lease new, high-end equipment after your lease expires.

Disadvantages:

  • Higher overall cost. Leasing an item is almost more expensive than purchasing it. For example, a three-year lease on a computer worth $4,000 will cost you a total of $5,760 vs. buying out right at $4,247 (taking into consideration the time value of money), a savings of $1,513 by purchasing vs. leasing.
  • You don’t own it, so you don’t build any equity. Lack of ownership can be a significant disadvantage.
  • Obligation to pay for the entire lease term even if you stop using the equipment. Some leases give you the option to cancel the lease if your business changes direction and the equipment you leased is no longer necessary. However, you could incur an early termination fee.

To buy or not to buy?
Purchasing equipment can be a better option for established businesses or for equipment that has a long usable life. Ownership and tax breaks make buying business equipment appealing. However, the initial costs mean this option isn’t for everyone.

Advantages:

  • Ownership is the biggest advantage of buying equipment. This is especially true when the property has a long and useful life and is not likely to become technologically outdated in the near future, such as office furniture or farm machinery.
  • Tax Incentives. Check with you tax accountant to get the latest tax incentives that the IRS will allow.

Disadvantages:

  • Higher initial expense. If you pay cash, it takes away working capital. If you take out a loan, most banks will require a minimum down payment of 20% and lenders may place restrictions on your future financial operations to ensure that you are able to repay your loan.
  • Getting stuck with old equipment. If you buy equipment that is high-tech you run the risk the equipment may become technologically obsolete and will have very little resale value.

So you still haven’t answered the question.
It’s your call to make, not ours. When deciding whether to buy or lease business equipment, figure out the approximate net cost of the asset. Figure in tax breaks and the resale value when making this calculation.

After determining which option is more cost-effective, consider other intangibles such as the possibility the product will become obsolete or that your need for the product will expire before the lease does. Each decision regarding buying or leasing needs to be made carefully to best fit your company’s situation and needs.

Is it time to join the SELL party?

As a business, you have a lifecycle. This cycle includes fun steps such as startup, growth and maturity, as well as a few growing pains like decline and rebirth/innovation/closure. One of the ways to continue this circle of life (anyone else have Lion King stuck in their heads now?) is through merger or acquisition, as this allows you to pursue new growth or get a fresh start with new ownership.

Now you may be thinking, my organization is far too small for M&A (that’s fancy speak for merger and acquisition) activity. We understand where you’re coming from. After all, business media often reports on large size M&A deals and transactions, supported, brokered and executed by investment banks. The names of the organizations involved sound familiar as they often appear on a little list known as the Fortune 500.

Well we’re here to tell you that M&A is a viable tool for growth in smaller sized businesses. You are welcome.

The Lowdown on M&A

The reasons for deciding to sell in any merger or acquisition is similar, regardless of size, geography or industry of a business. In other words, all of these things are like the other.

Here’s a few common reasons why firms consider M&A:

  1. The owner(s) would like to say ‘hey hey hey, goodbye’ and exit the business by passing on the operational responsibility to family, the management team or an outside buyer.
  2. Desire to combine with a strategic competitor or similar company to gain market share or to create synergies and increased profits. Keep your friend close …
  3. A need for additional capital to continue growing, innovating and expanding.

Why Sell Small?

First, a few definitions. Middle-market companies are typically defined as firms with $50 million to $1 billion in revenues. Lower middle market firms are defined by $5 million to $50 million in revenue.

As you can see, the reasons for M&A activity can be applied to any size company. Now, more than ever, owners and managers of lower-middle and middle market should consider the benefits of using the M&A space as a means of building wealth. After all, it’s trendy.

What do we mean by trendy? Well, professionals at the Faegre Baker Daniels 2015 M&A Conference described the M&A space as “frothy” and “hot” (no, they weren’t describing their Starbucks choice), followed by the same individuals projecting that “hotter” and “pricey-er” would be adjectives to define the space through 2016.

This is occurring because of a few things:

  • Record-high multiples and all-time high selling prices which are being driven, in part, by unused capital. This capital is used for investment by Private Equity Groups (remember them?). In other words, the money’s burning a hole in their pockets.
  • Strategic buyers looking for strong add-on businesses. Don’t remember what a strategic buyer is? We’ve got you covered.
  • Shortage of high-quality sellers. We know there are solid companies operating in the lower middle market without an exit plan. Those without an exit plan are either hoping to live forever or are fine with the company dying when they do. Even those that are contemplating a potential sale are often unsure of how to go about it. We understand selling your business can be a daunting task filled with change, emotion and uncertainty.
  • The increasing EBITDA margins of smaller companies. Largely through the use of technology, smaller companies have been able to post high margins. This allows companies with lower revenues to still attract private equity attention.

The moral of the story … it’s becoming an increasingly lucrative time to sell. But wait, there’s more. Because this is such a fun party to be at, family offices have also entered the market as interested buyers. This competition forces buyers to be prepared, expediting the transaction process and generating higher sale prices. Think about it like this … you’re the guest of honor at a party, where everyone else has arrived to see you and you alone.

Are You Ready to Sell Your Business?

This party is happening, regardless the size or industry of your organization. Rather buyers are looking for management who know what they’re doing and defendable growth projections. You can easily have these, regardless of your size. There is no formula or magic metric that can define the ‘perfect’ time to begin the process of looking for a buyer for your business. Hey, we’re not going to give you all the answers.

Rather, you have to look at your own long-term business and personal financial goals. This will be your trigger to join the M&A party. But we will caution you with this. The transaction process is more than just a snap of your fingers. It’s complex and time-consuming. So make sure you bring a guest to your party … a trusted business advisor you will advocate for your best interests.

sell sell sell