Ideally your advisor can work with you to implement strategies to mitigate taxes without negatively impacting the value of your business. The use of retirement accounts is an example of that type of planning, as part of the valuation process involves recasting financial statements and tax returns. By developing a paper trail of legitimate deductions, your M&A advisor can “recast” your income statement by adding back contributions to the owner’s retirement accounts.
In addition to positive actions to apply, you also need to avoid negative actions that will diminish value. For example, deferring income and accelerating expenses. Buyers expect to see consistent rules for the recognition of income and expenses. One way to “have your cake and eat it too” is to have accurate Accrued Basis financial statements, but report your taxes on a Cash Basis. This does not work for all businesses and you should work with a qualified accountant to implement this strategy thoughtfully.
A typical strategy that we see with companies that use expensive equipment is to buy equipment at year end to reduce taxes. If you truly need the equipment and it will provide an appropriate ROI, acquire it. But you might want to consider leasing instead of buying because most buyers will assume a lease. As most businesses are sold “Cash free/Debt free,” the seller winds up paying off any installment notes, including on vehicles. Feel free to contact us, if you have a question about the implications of your year end planning and its impact on a future business sale.
(originally published in the November 2019 eNewsletter)