4Thought Blog

When the owners of a family business are ready to sell, there are many considerations. Among the most important is handling the sale in a tax-wise manner.

In most cases, the buyer wants to make a direct purchase of the company's assets — as opposed to buying all the ownership interests in the legal entity used to conduct the business. A direct asset purchase allows the buyer to "step up" the tax basis of the acquired assets to reflect the purchase price. That means bigger post-purchase tax write-offs for depreciation, amortization, cost of goods sold and so forth.

A specific set of federal income tax rules applies to these transactions. Sellers who plan ahead can minimize their tax bills. Those who don't often pay too much to Uncle Sam and their state tax collectors.

The balance sheet — which shows a company's assets and liabilities — is a logical starting point for valuing certain types of businesses.

The cost (or asset) approach specifically focuses on this part of a company's financial statements. Here's an overview to help you understand this valuation technique.

Employee stock ownership plans (ESOPs) provide tax-saving opportunities for business owners who want to cash out and transfer ownership to employees without immediately giving up control of the business.

However, valuing stock held by an ESOP is an ongoing challenge for the fiduciaries who administer them, especially when the sponsoring company is privately held.

When it comes to selling your business, you must consider the buyer's perspective — not just your own — to get the deal done.

Both sides will require certain due diligence procedures, which take time and patience to get through. Here's what to expect, including some tax considerations.

In the fourth quarter of 2021, CEO resignations were up 16% over the prior year, according to executive outplacement firm Challenger, Gray & Christmas. Recent and announced high profile departures include Twitter's Jack Dorsey, Amazon's Jeff Bezos and American Airlines' Doug Parker.

This trend is expected to continue into 2022 as executives swap high-stress positions for more family time. Would your business survive if its CEO or founder suddenly jumped ship?

Large public companies often have deep management structures and succession plans in place. So, they can usually recover from the loss of a C-level executive over time, except in rare instances.

It's more common for smaller businesses to depend heavily on a key person — and the actual, or even the potential, loss of that individual is likely to have a major impact on value. Key person discounts are applied to reflect the reduction in a company's value resulting from such a loss.

Most business owners and attorneys know the basics of the business valuation process.

For example, you might know that there are three approaches to value: the cost, market and income approaches. You might even know some of the methods that fall under these approaches, including the:

• Adjusted book value,
• Excess earnings,
• Guideline public company,
• Merger and acquisition,
• Capitalization of earnings, and
• Discounted cash flow methods.

But experienced laypeople also understand that the process of valuing a business is not simply a matter of plugging numbers into these "black boxes" and having the answer spit out the other end. Instead, the valuation analyst uses professional judgment to arrive at a reasonable conclusion of value.

If you own a business, you're probably familiar with the protections provided by buy-sell agreements. But do you know how important these documents can be to an estate plan?

Because buy-sell agreements specify whether, and under what circumstances, owners' interests may be transferred, they can help you control the ultimate disposition of your business and achieve other important estate and succession planning goals.

When a business is owned by more than one person, it's generally advisable for the owners to enter into a contractual agreement that prescribes what will happen if an owner dies, becomes disabled, retires or otherwise leaves the company.

Some market analysts predict that the COVID-19 crisis may trigger an increase in buyouts. For example, some struggling owners may decide to throw in the towel after months of teetering on the verge of bankruptcy. Or squabbling partners may disagree about the future of the business and decide to part ways.

So, now is a good time for owners to draft or update a buy-sell agreement. Here's a look at common valuation issues and potential pitfalls to avoid.

Business valuation is a prophecy of the future. That is, investors typically value a business based on its ability to generate future cash flow.

However, with so many uncertainties in the current marketplace, forecasting expected cash flow can be challenging.

In today's environment, it's important for business owners to focus on the value of their company and what drives it. The objective of this article is to look at value drivers for operating businesses, as opposed to businesses that are asset-based, such as real estate or securities holding companies.

Under the market and income approaches, operating businesses are valued based on how much cash flow they're expected to generate in the future. In other words, cash flow drives value.

If you want to increase value, you need to increase sustainable cash flow.  Notice, we said the sustainable cash flow. While it might look good to have a short-term increase, an educated buyer will see through any non-sustainable increases and adjust those in determining the purchase price.