Read the original article here If you are selling your business, your goals should dictate your approach to everything from corporate structure to tax planning. There are many ways to structure M&A transactions, each with different tax implications, so the decision of how to sell is just as important as what to sell.
Engage in business planning before negotiations go too farThere are any number of reasons to sell a business, whether personal, strategic or commercial. Understanding what is important to you and how the sale fits into your overarching strategy and objectives is an essential first step in the planning process. Does the business have special meaning to you? For example, is it a family business? Do you consider it to be a strategic asset? Although basic, these questions will influence the entire transaction, and help you optimize after-tax returns. Those tax implications can then inform your decisions concerning the pricing, conditions, schedule, and structure of the deal. In certain circumstances, the right planning can impact the net return on a sale by 10-15% — a significant margin. It is also important to understand that business planning should take place before the negotiations become too advanced. Once you’ve signed a letter of intent, it may be too late to make key decisions on the transaction which will maximize tax efficiencies on the overall sale. Once negotiations are underway, you may be surprised at how quickly they unfold – the process often takes less than two months. This does not leave much time for corporate planning, so there is a balance to strike as a seller. While you don’t want tax planning to drive you’re planning as a vendor and other strategic considerations, it is still a good idea to be proactive, and not be inhibited from taking decisive action for tax reasons later on. We recommend that you start with a clear outline of your corporate objectives and optimize tax results accordingly. While buying takes months, selling takes years. If you are the seller, you should think about the possibility of M&A at least three years in advance because this will help determine how your business grows. In contrast, buyers are usually responding to market dynamics, although they will also have long-term objectives of their own.
Understand the buyer’s motivationsAs a seller, you should have a strong understanding of the value of your business, your role in the market, and what intangible factors may motivate prospective buyers. For example, some buyers are motivated by competitive factors, and will place a premium on their competitive position. These factors are quantifiable and should be well understood before the terms of the transaction are settled. Although buyers respond to market opportunities, they also engage in long-term planning. A significant part of their strategic plan may include buying businesses to achieve their objectives. So, this is not usually a spontaneous decision, as the buyer will be identifying targets in advance. The buyer’s strategic motivations will usually include one, or more, of the following:
- The targeted business is in the same sector, perhaps as a key supplier;
- The targeted activities are innovative and show significant promise;
- The acquisition may lead to economies of scale and increased profitability;
- There are competitive advantages to be gained in a geographic area; and
- The acquisition is done sooner than intended due to intense M&A activity in a sector or a geographic area.