M&A: Don’t overlook tax impact on sellers

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One commonly overlooked aspect of a mergers and acquisitions (M&A) transaction is determining the tax impact on the seller. Without proper tax planning during the early stages of the transaction, you may end up hitting a home run in terms of sale price — only to give away much more than necessary to Uncle Sam.

We highly recommend that anyone looking to sell their business use an intermediary firm with a CPA (or even better, multiple CPAs) on staff so that a potential sale transaction can be negotiated from inception. Focusing on an optimal tax structure should be in the forefront, not relegated to a last-minute detail. It may be too late by then to make any material structural changes.

Proper tax planning as it relates to the sale of a business depends upon several factors, but the most important is how the seller is set up in terms of legal entity type. A C corporation (C Corp) can be challenging, because of a double tax concern, but there are solutions to substantially reduce such adverse consequences. Even if the seller is a pass-through entity, such as an S corporation (S Corp) or limited liability corporation (LLC), the difference between ordinary marginal income tax rates vs. long-term capital gain rates of almost 20 percent can provide opportunities to properly plan for greater after-tax proceeds.

If you want to minimize the tax bite, do your tax planning in conjunction with the negotiation of deal terms — not after the deal has closed.

[Related: M&A: How to maximize your pest management firm’s potential // Pest industry M&A: A historical perspective]