At this time of year, many business owners with calendar year ends are, or should be, in conversations with their accountant or tax advisor about yearend tax planning. Part of those conversations involve tax mitigation. Although none of us like to pay taxes, if you are considering selling your business within the next three years, your tax planning relating to tax mitigation should also factor in the implications relating to maximizing the value for of your company for sale purposes. Below are a few items to consider.

Deferral of Income – A common tax strategy is to defer income and accelerate expenses. As a significant driver of the value of your business is its profitability and the income and cash flow that it generates, this strategy may decrease the value of the business. Additionally, it may distort the profitability of the business between years. Both buyers and lenders like consistent earnings and are typically willing to pay more or lend more for them.

Discretionary Expenses – When we are interviewing prospective clients to determine the true profitability of a business, it is not uncommon to discover some aggressive expenses accruing to the shareholders. Common examples include travel and entertainment, excessive rent (if the operating entity leases space from property owned by the shareholders), and vehicle expenses for the shareholders and family members. Although these expenses will reduce taxes and some might be considered an adjustment for recasting purposes, many of the aggressive expenses will be discounted by the buyer and the lender and ultimately result in a lower value being attributed to the business. As most formulas for valuing a business include a capitalization of earnings, the money saved by reducing taxes can be significantly less than the enhanced value of the business resulting from showing an accurate profit.

Equipment Purchases – We consistently tell our clients and prospective clients to run their business as if it were not being sold, so certainly if you need a piece of equipment that will enhance the business, you should acquire the asset. That is different than buying a new truck at the end of the year just to take accelerated depreciation. As most businesses are sold “cash-free/debt-free,” a buyer typically will not assume any equipment loans. Also, the increased amount of equipment value may not translate to a comparable increase in business value. In lieu of purchasing the asset, it might make more sense to consider leasing the asset, as buyers will sometimes be more willing to assume a lease.

The above are just a few of the many things to consider at this time of year, and we strongly suggest that you visit with your tax advisor to address your particular circumstances. There are many tax mitigation strategies, such as retirement accounts, that can reduce your tax liability, but still leave a paper trail that will justify an add-back so as not to diminish the value of the business.

The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.

Ronald V. Chernak
President

Inspiring business relationships since 1982!

Interior Design Firm/Commercial #2016

This Company provides a service to developers, homebuilders, and apartment management companies throughout the country.   With a long history of increasing sales and profits, this business would make an excellent acquisition candidate for a sales- and marketing-oriented entrepreneur or a synergistic acquirer looking to expand its offering of services.