Buying and Selling Closely-Held Corporations
Reilly, Robert F., Schweihs, Robert P., The National Public Accountant
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 the business sale.
Alternative Structures for the Sale of a Closely-Held Corporation
Assuming that the sale of the closely held corporation is to be taxable (i.e., not a tax-free merger or exchange), and that the selling corporation is not a member of a consolidated group, there are three common alternative tax structures for the sale transaction:
1. a sale of the corporation's assets;
2. a sale of the corporation's stock; or
3. a stock sale with an Internal Revenue Code Section 338 election (which treats a taxable sale of stock as if it were a taxable sale of assets).
The alternative structures of the business sale transaction have greatly disparate tax and non-tax consequences. Accordingly, deliberate transaction planning and structuring will both produce income tax savings and will maximize the non-tax benefits to the parties.
Taxable Sale of Assets Transaction Structure
A taxable sale of assets is generally undesirable from the seller's standpoint. This is because two levels of income tax will ordinarily be paid on the business sale transaction. First, the selling corporation will recognize any gain on the appreciation of its assets, both tangible and intangible, when it sells them. Second, when the selling corporation is liquidated and the proceeds from the sale of the assets are distributed to the corporation shareholders, the shareholders will also recognize gain on the excess of the proceeds received from the sale over their bases in the stock. …