When the Business Must Be Sold Outside the Family:
Key Negotiating and Tax Issues
Family Business Quarterly
by Stephen Minson and Gary Hayes
As accountants for closely held businesses, we are normally concerned with the transition of a family business to the next generation. In some cases, however, it may be impossible for the business to be passed on to the next generation. For example, the owner of a closely held business may not have children who are interested or qualified to run the business. In this situation, the owner may have no choice but to plan for the sale of the business.
In this event, a number of important issues should be considered. Once a potential buyer is identified, there is normally a period for due diligence, during which the buyer and seller exchange financial and legal information about the companies. Before this exchange of information, the parties may sign a letter of intent. The letter of intent may require that all information exchanged will remain confidential, and the parties agree not to entertain offers from other parties during the due diligence period. More…
Selling Your Company With Minimal Capital Gains
Related Matters Newsletter
by Kevin M. Flatley, Esq.
Private Bank at Bank of Boston
Some years ago, two brothers came to my office intent upon selling their business. They each were to receive $1 million and were prepared to pay what today would be a 28 percent federal capital gains tax including better than a ten percent capital gains tax to the Commonwealth of Massachusetts. This meant a $300,000 tax payment from each of them.
Instead of paying this tax, they simply sold all their corporate assets and the buyer also bought their corporate name. This left them with a “personal holding company,” the remains of their old company, but with a new name. The personal holding company held nothing but cash.
Our first reaction is that this is no bargain for these individuals; they will be taxed twice on their income, once at the corporate level and a second time as the income is paid to them as dividends. Further, we assume that eventually someone is going to pay the capital gains tax. Our two brothers, however, never paid taxes on their income at the corporate level; and when they died some years ago, the death resulted in the forgiveness of all capital gains. The reason is that the brothers took advantage of two major benefits of the tax law. More…