Buying and Selling Closely-Held Corporations

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Accountants are often called upon by family-owned or closely-held corporations for advice on a business sale or purchase. These "transactional" appraisals may involve assisting clients with transaction pricing and structuring or negotiating the deal, or providing an opinion on the fairness of a proposed transaction.

Accountants are often called upon to perform "notational" appraisals for litigation support, dispute resolution, expert testimony and other controversy-related purposes. Nonetheless, even in these "notational" accountant roles, the appraiser is attempting to estimate what a buyer would actually pay for the subject business or business interest.

For each of the valuation purposes, the accountant should consider the alternative tax forms of the sale of the corporation for several reasons. First, the form of the sale could directly affect the pricing of the closely-held corporation sale transaction. Second, the most likely form of the sale will influence the selection of guideline companies and guideline transactions--from which valuation multiples may be derived. Third, the form of the sale may affect any adjustments that need to be made to the selected guideline companies and guideline transactions--before the valuation multiples are calculated and applied to the subject company. Fourth, the most likely form of the sale may directly impact the prospective net C cash flow projections of the subject company, particularly with regard to depreciation and amortization expense and to the effective income tax rate-and, therefore, the present value discount rate--of the subject corporation. Finally, the form of the sale may affect the assets encompassed in the sale, including the intangible assets, and the liabilities encompassed in the sale, including any taxation-related liabilities.

Certainly, if the business owners ask the business appraiser to advise them regarding the net proceeds to expect from the sale of their closely-held corporation, then consideration of the alternative tax forms of corporation sale is essential to the valuation analysis. Consideration of the alternative forms of a closely-held corporation sale should also be relevant to the parties in interest to a litigation.

This article will review the most common tax structures of corporate sale transactions and will consider the pricing influences of the most common alternative tax forms of deal structuring on the valuation of …