Selling a C-corporation can be challenging due to the risk of exposure to corporate tax and double taxation. Recently we helped three different clients negotiate successful business sales when they were concerned the transaction would present them with an undesirable tax burden.
In a perfect world, the ideal approach is to sell stock to maintain capital gain treatment. In many cases, however, buyers are not open to acquiring stock. Quest was able to determine and negotiate three unique solutions for recent clients asking for guidance with a C-corp defense.
Strategy: Prove the existence of personal goodwill
We were able to support a portion of the sales price for a manufacturing and installation company to be considered for personal goodwill. To show that certain assets were property of the owners as individuals, and not the corporation, we highlighted personal relationships they maintained with customers and vendors while leveraging other considerations, including the fact that they did not have employment agreements with the company and that the buyer was bargaining for covenant not to compete in the transaction.
The result was a mitigation of double taxation and realization of tax savings.
In addition, our solution led the C-corporation to continue to exist, which will allow the owners to support future business ventures using the sales proceeds and further offset corporate tax while minimizing exposure to double taxation. The arrangement also permits the support of ongoing expenses of the company post acquisition of the existing company while transitioning into the new venture.
Strategy: Take advantage of Qualified Small Business Stock
In another transaction, Qualified Small Business Stock was present, which would allow the seller to take advantage of tax-free gain. To realize this possibility, we were able to pursue a stock sale, negotiating a scenario where the buyer was willing to pay for stock.
Strategy: Sell shares to an ESOP trust
We recently were part of a deal team that sold their shares to an ESOP trust. As part of our work, we analyzed the tax-free rollover of C-corp stock sales to an ESOP.
In addition to creating tax strategies that minimize the taxation of a sale, Quest supports a competitive process by helping clients prepare for their sale by optimizing profitability in advance and by marketing the business to multiple parties to create competition. Our services include not only the execution of the sale and tax plan, but also continuing support post transaction – ALL part of the QUEST of our customers.