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.

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.

 

 

The Path to Buy/Sell Happiness

You’re going along, building your empire and running your company when all of a sudden, there’s a knock on the door. You open it to find someone asking to buy your business. You’re honored, flattered even. After all, someone just showed interest in the thing you’ve poured your blood, sweat and tears into. But in addition to the spring in your step, you also feel an ulcer coming on … what’s next? Where do I go from here?

Yes, the above situation is slightly exaggerated. But someone reaching out, completely out of the blue, with an offer to buy your business does happen. So it’s best to be prepared. Selling your business is more than a tour of the office, a handshake and exchanging a check. It’s complicated, often messy, and intense. We’re talking six months (yes, you read that right) of data gathering, negotiations, analysis and emotional upheaval.

Now, before you freak out, let’s take a step back and walk through the process. Consider it like a relationship.

First, let’s talk about the parties involved. The buyer is the person who wants to buy your company (clever right). They really want to date the seller (that’s you).  Other parties can include financial advisors, transaction advisors, banks, lawyers, etc. (otherwise known as the peanut gallery).

Step One: Getting to Know You

Once interested, a buyer will need information to determine the price they are willing to pay. After all, they want to be prepare for the date, not just fly blind. It’s up to you as the seller to decide how much information to give them and when. While this question is enough to constitute its own blog post, here’s the short answer: NOTHING.

You should give a potential buyer NOTHING until they sign a non-disclosure agreement (NDA). This is a legal document that protects your information as the seller and ensures the buyer is only going to stay on the up and up (read, use the information you give only to formulate their offer).

Only after a NDA is signed should you (with the help of your trusted business advisor), formulate a plan to give the buyer the information they need to understand your company. Note, this does not mean just giving them everything they ask for, but instead enough for them to submit a range of value offer.

Step Two: A Promise

After preliminary due diligence (using the information you have supplied them with as well as other research), the buyer will typically give a range of value in the form of an Indication of Interest (IOI).

Consider it like this. You’ve had some initial dates and things went well. The IOI is like a promise ring in your relationship with the buyer. It’s not always done or necessary, but it signals you’re ready to move to a more serious place, without making any concrete plans related to time, date or dollar amount.

Step Three: Opening Up

 If you like the indication of interest made by the buyer, you accept the promise ring and let your guard down a little more, allowing yourself to be more vulnerable. This means you give the buyer more access to information surrounding your company. This information may include key contracts or agreements, customer lists or more detailed financial information.

Step Four: The Engagement

This vulnerability or sharing of information allows the buyer to see a cohesive picture of your business and hone in on a more precise value. These terms are then laid out in the Letter of Intent (LOI). The LOI can be compared to the sparkling rock that accompanies the proposal in a relationship.

At this point, you both largely agree to the terms put forth. The LOI typically covers the purchase price, the structure of the deal, whether it is an asset or stock sale, the escrow parameters, the working capital allowance and other details that your advisor can help you understand. As a note, while the LOI is a very intentional document, it’s non-binding.

Step Five: Going to the Chapel …

After negotiation, review of legal terms and final due diligence, it’s time for your big day. Cue Canon in D and begin your walk down the aisle because you’ve made it to the marriage portion of the journey. Known as the Purchase Agreement, this binding agreement is agreed upon by both parties and will be a road map for how thing play out once the deal is closed.

The Selling Relationships (1)

This blog illustrates high level the transition through the selling journey. There will be bumps along the way (similar to a relationship), but it’s important to remember a few things as you go through:

  • Know your end game. This business is yours and you’ve put a lot of hard work into it. So know what you want from your business and a potential sale, as well as what you don’t.
  • Engage the peanut gallery. Don’t enter this relationship alone. Get advice from trusted business advisors and people who have gone through these situations before. They’ll help you navigate the bumps along the way and make sure you go down the aisle with confidence.

 

 

 

S-Curve of Business: Stage 5

Don’t get confused. Read about Stage 1, Stage 2, Stage 3 and Stage 4.

Welcome to stage 5 of the s-curve of business, also known as breakthrough. If your business has reached this point it means your dream has taken off. As a result, you’re likely wearing many hats. You could be getting new customers, keeping on top of operations, delivering on promises made, making sales calls, keeping your current customers happy, and so on. In other words, you’re finding it very hard to say no, especially when each of these things is helping your company grow and thrive.

We get it. It’s an exciting (and probably incredibly exhausting time). It’s also a time when things can start to go very wrong. Why? You simply aren’t physically capable of doing everything yourself anymore.

This is the issue at the heart of the breakthrough stage – scalability. In other words, can you grow your organization so it operates on a larger scale? Or do you go back to where you were before?

This is a critical choice for entrepreneurs. While it’s great to see your dream grow and thrive, scalability is not always fun. You’re going to have to make some excruciating decisions, particularly about people. Are the right people in the right seats? Do their personalities and work styles jive with the culture and mission of the company you created?

Further, you have to be able to fund operating on a larger scale. Raising capital is tremendously difficult. In essence you are reinventing your company and transferring your value proposition (a statement that summarizes why a consumer would buy a product or use a service from you). Before the value proposition of your company was YOU. Now, it’s something larger and it needs to permeate through the entire organization.

These are tough decisions to make, but they matter if you want a healthy, sustainable business. It’s also important to remember how you got here and the importance of each step along the cycle. After all, all growth companies go through numerous S-curves during their existence, especially as they refine their products and services for their customers. Don’t believe us? Just look at the progression of companies like Apple or Microsoft.

So as you walk down the S-curved road, make sure to learn from each stop along the way. Generally speaking, the five stages are linear. If you skip over one, you may end up paying the price somewhere down the road.

No, we’re not being dramatic. Here are a few examples of things that may happen:

  • If you don’t formulate and go right into concentration, you’ll end up with a lot of activity with no direction or purpose.
  • If you don’t do the legwork of concentration, you’ll miss out on valuable learning experiences and insights that only come from hard work and perseverance.
  • If you skip out on the momentum stage, you’ll potentially miss the conversation related to how your company can run on a larger scale. Think clarification of the decision making progress.
  • Without taking the time to think through your future in the stability stage, you’ll miss the crucial conversation of where your business should go next.
  • Getting to breakthrough allows you to reinvent your company and build a larger, more scalable model.

So enjoy the journey, but also understand the importance of each of these stages. And we hate to sound like a broken record, but a trusted business advisor will be able to help you navigate each step. If you want to learn more, let us know. We’re always here to help.

Breakthrough