The Aspens are changing colors, which means that fall is upon us. It also means that as business owners, we should start planning for year-end tax strategies, assuming that your tax year ends on December 31st.
(For those of you that have fiscal years ending on dates other than December 31st, read this article and then put it away until about three months prior to your tax year-end.)
Developing your tax strategy should start with visiting your tax advisor and often includes discussions about deferring income and accelerating expenses. However, if you are considering selling your business within the next three years, you should share that information with your tax advisor, and you may want to consider modifying that strategy.
With the understanding that no one, including yours truly, likes paying taxes, the potential sale of your business may alter your tax planning. Although your most recent tax return and year-end financial statements may be the most important documents impacting the value of your business, businesses are rarely valued based on one year’s performance. Buyers and lenders typically look at a minimum of three to five years (and sometimes longer) of past performance in determining value.
In fact today, I was talking to two different Private Equity Groups interested in acquiring one of our clients in the building products industry. Both groups inquired about our client’s performance in 2008 and 2009 to determine vulnerability during an economic downturn. Many lenders look at the most recent two years as part of a stress test to determine the company’s ability to meet debt service payments. Having consistent accurate financial performance usually results in a higher price with better terms for the Seller. Internally, we describe this as “investing in taxes.”
Tax Considerations When Planning to Sell Your Business
Aside from the realization of income and expenses previously discussed, there are other considerations that you may want to discuss with your tax advisor. We typically advise our clients to run their business as if it were not being sold. However, there may be some exceptions, such as the following:
It is fairly common for us to talk with potential clients that tell us that they bought new equipment at year-end in order to reduce income and taxes. If the equipment is truly needed, you may want to consider leasing the equipment instead of an outright purchase and having the buyer of your business assume those leases. If the new equipment is not truly needed, you should consider deferring its acquisition. Sellers will not typically recapture the full cost of the new equipment when the business is sold.
Moving the Business
Similarly, if truly needed, do what needs to be done, but take a deep breath before acting. Prior to buying the building at our current location, I moved my business on a couple of occasions, due to outgrowing the then-current location or obtaining better productivity from the new location and configuration of the facility.
In addition to the actual dollar cost of the move, there was disruption due to planning, packing, getting reoriented in the new location, and the cost of advertising to let past, current, and future customers know that we moved to a new location. It might take a year or longer to recapture the lost productivity. Additionally, if you are a location-sensitive business such as a restaurant or retail business, a move injects an element of risk into the equation for the Buyer and lender.
The above are just a few examples of situations involving tax planning. While your accountant is probably the best source of guidance, and we may be able to “recast” some of the expenses relating to a move or other event, my team would be willing to consult with you, if you have specific questions that you would like to address. Our consultations are confidential, without obligation, and usually without cost to you, unless the situation requires an extensive engagement of time.
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
Inspiring business relationships since 1982!
(originally posted in the October 2017 newsletter)