Pest Management Professional, December 2013

EXIT STRATEGIES Purchasers are only looking to buy a customer list avoid unknown liabilities and write off the purchase price paid for the business for tax purposes Continued from page 23 Personal or business H ow does one differentiate personal goodwill vs business goodwill if they seem to be intertwined The following partial listing of certain identifiable characteristics highlight part of the analysis a taxpayer needs to undertake to make any conclusion whether the Martin Ice Cream case is helpful establishing that a business owner has significant goodwill personally owned rather than a business asset of a C corporation Personal goodwill sample characteristics More common in companies with higher portion of intangible assets No noncompete agreement exists between the selling shareholder and the corporation Business is dependent on owners personal relationships reputation skills and know how Owners service is important to sales Owners are involved with the business operations Loss of owner would have a negative effect on revenues profits Business goodwill sample characteristics Non compete agreements Larger business with formal organizational structure processes and controls Sales are generated from company brand name recognition and the company sales team Manufacturing businesses or companies that are asset intensive Selling shareholder isnt intimately involved with the business Loss of owners wouldnt have a material impact on revenues profits buyers want to buy assets and get more favorable tax benefits Additionally in an asset purchase deal liabilities stay with the seller and the buyer takes the business assets free and clear of potential unknown or contingent liabilities as mentioned above As for the second method waiting five or 10 years to avoid the double tax problem is an inordinate amount of time Continued on page 28 Many attorneys who organize corporations do so as a C corporation because they might not be versed in the tax strategies of an S corporation or the S election might not be appropriate for certain companies Unfortunately C corporation profits are taxed once at the corporate level and again when distributed to the shareholders the dreaded double tax We assume that throughout the years youve been able to avoid the double tax problem by giving salary increases to the shareholders renting buildings or equipment from them and generally using the standard strategies that most C corporation owners use to eliminate any corporate taxable income by year end So what happens when you decide to sell your business and the C corporation makes a windfall taxable gain as a result The purchaser will likely want to structure the deal as an asset sale because almost all business sales in the professional pest management industry are structured this way For the most part purchasers are only looking to buy a customer list avoid any unknown liabilities and write off the purchase price paid for the business for tax purposes There are two common methods to eliminate the double tax in this situation 1Sell the shares of stock of the C corporation to the buyer instead of the C corporation selling its assets to buyer 2Make an S corporation election and wait 10 years recent tax law changes shortened this to five years to sell your business to avoid the 35 percent built in gain tax imposed on converting C corporations who fail to wait the full nonrecognition period before selling the business The first method sounds easy enough but a seller will soon learn most 24 December 2013 Pest Management Professional www mypmp net