Should I Sell Stock or Assets?

The structure of a business acquisition can have significant tax implications for the seller of a business.  Where the business is operated in the form of an “S” corporation, the corporation pays no tax on the sale of assets, any gain is allocated to the shareholders and such gain is reported on the shareholders' personal income tax returns.  The shareholders then pay tax on such gain at the capital gains rate.  So where the business is owned by an “S” corporation, there is little difference tax-wise between sale of assets or sale of stock. 

But where the seller is a “C” corporation, there can be a significant advantage to selling stock rather than assets.  When a “C” corporation sells assets, the corporation pays tax on the gain realized at the corporate income tax rate (there is no corporate capital gains rate).  The shareholders then pay tax on the same money when the sales proceeds are distributed to them as dividends.  This “double tax” effect can make the sale of assets by a “C” corporation a very costly way for the seller to structure the transaction.

On the other hand, if the shareholders of a “C” corporation sell the stock of the corporation rather than its assets, the corporation pays no tax, and the shareholders pay only capital gains tax on the sale.  This can be a very significant tax savings.  Moreover, the shareholders may also be able to exclude all or part of the gain if the stock is “qualified small business stock” under IRC Section 1202 (QSBS). 

If you want to discuss selling your business, or want to know more about the QSBS gain exclusion, please give me a call.   Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  Under IRC section 338(h)(10), the parties can elect to treat the sale of “S” corporation stock as a sale of assets for federal income tax purposes.  If you are interested in knowing more about making a section 338(h)(10) election, give me a call.  Jsenney@pselaw.com or 937-223-1130.

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Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Immigration Law, Litigation, Arbitration, Mediation

Should I Buy Stock or Assets?

The structure of a business acquisition has significant tax and liability implications for the buyer.  When you buy the assets of a business, you are able to allocate the purchase price among the acquired assets and step-up the basis of such assets for depreciation purposes accordingly.  The increased depreciation deduction resulting from the stepped-up basis helps the buyer protect future business income from taxation.

Buying assets rather than stock generally protects the buyer from liabilities of the selling corporation.  In an asset transaction, the buyer is generally liable only for those liabilities which the buyer expressly assumes. 

For both of these reasons, buyers generally prefer an asset deal and are willing to pay a higher purchase price if the deal is structured as an asset acquisition rather than a stock deal.  On the other hand sellers are generally better off if the deal is structured as a stock sale.

When the owners of a “C” corporation sell assets, the corporation is subject to tax at ordinary income rates on the gain realized on the sale of assets, and the owners then pay tax at capital gain rates on the sales proceeds distributed to them.  But if the owners sell the stock of the corporation, the owners are only taxable once on such sale, and such sale is taxable at capital gains rates.  Moreover, if the owners sell stock, all of the liabilities of the business remain with the corporation and in effect become the responsibility of the buyer.  For these reasons, sellers generally prefer to do a stock deal and will accept a lower purchase price if the deal is structured as a stock deal.

If you are considering buying a business, or need assistance with negotiating the deal or drafting the acquisition documents, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  The double tax effect of selling assets is eliminated if the selling corporation is an “S” corporation rather than a “C” corporation.  So owners of a “C” corporation who are considering selling the business in the future should consider converting to an “S” corporation.  There are certain built-in-gain rules which are intended to tax gain on sale of assets by an “S” corporation which was previously a “C” corporation.  But with some planning, the built-in gain tax can be reduced or eliminated.  If you want to know more “S” corporations or built-in gain, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

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Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Immigration Law, Litigation, Arbitration, Mediation

Any Simple Ways to Set a Buy-Out Price?

Determining the proper price to use in a buy-sell agreement can be a challenge.   On the one hand, you generally want the price to be an accurate reflection of fair market value.  On the other hand you want the valuation process to be as inexpensive as possible.  And in every case, you are trying to create a valuation process now that controls the calculation of a buy-out price to be used upon the occurrence of a trigger event in the future.

Some companies use a formula to determine the buy-out price.  Typical formulas are a multiple of EBITDA or a percent of net book value.  Formulas appeal to some business owners because they are generally easy to apply, and avoid some of the expense of a full-blown valuation.   But businesses change over time, and there is no assurance that a formula will continue to provide an accurate valuation over time. 

Other companies use appraisers to conduct a business valuation.  These business valuations can be quite thorough and may involve multiple methodologies including: comparable publicly-traded company stock prices, liquidation value of assets and cash flow analysis.  These valuations can be extremely accurate, but may be more costly than new business owners think they can afford.

Other companies avoid the cost of the valuation process by drafting buy-sell agreements that prohibit transfer of ownership interests unless the transferring owner has first offered to sell his or her stock at the price offered by a bona fide purchaser.  By structuring the buy-sell agreement in this manner, the owners are avoiding the cost of an appraisal and are using an unrelated third party purchaser to set the value of the offered shares.    

Other companies go one step further and eliminate the need to find a bona fide purchaser by using a mandatory buy or sell provision.  This provision works as follows: Owner A offers to sell his stock to Owner B for X dollars a share.  If Owner B does not accept this offer, then Owner A must buy Owner B’s stock for the same price per share.  The theory is that this mechanism forces the parties to set a realistic initial offer price because the initial offer price can be used as a buy price or a sell price by the other party.     

If you want to talk about business valuation mechanisms or how to draft a buy-sell agreement please give me a call.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  Domestic international sales corporations (DISC) continue to present tremendous tax savings opportunities.  To take advantage of a DISC, you need to manufacture a product that ends up being used for the first time outside the United States.  You can reduce your taxable income by the greater of 4% of export receipts or 50% of export income.   If you want to know more about DISC, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

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Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Immigration Law, Litigation, Arbitration, Mediation

What is A Squeeze-Out Merger?

A squeeze-out merger is a device used to eliminate unwanted minority owners.  Under the Ohio statute (and the statute of many states), mergers must be approved by a super-majority of the shareholders (often 67%).  This super-majority requirement gives minority shareholders some level of comfort that a simple majority cannot squeeze them out.  However, this super-majority requirement can be (and often is) eliminated by the shareholders inadvertently.  Under Ohio law, the super-majority requirement that applies to many of the extra-ordinary corporate transactions including mergers can be eliminated by adding a provision to the corporation’s Articles of Incorporation stating that all shareholder decisions will be made by majority vote. 

Assuming one or more shareholders has the required votes (a majority or super-majority as the case may be) those control shareholders can eliminate the minority shareholders by approving a squeeze-out merger.  In a squeeze-out merger, the control shareholders set up a new corporation which only they own to be merged with the existing corporation.  Under the terms of the merger, the control shareholders are given all of the stock of the surviving corporation and the minority shareholders are cashed out.  The minority shareholders are unable to prevent the merger.  The minority shareholders only rights as dissenters is to demand and sue to receive fair cash value. 

A squeeze-out merger can be a powerful tool for control shareholders to remove disruptive minority shareholders.  But a squeeze-out merger can also be a heavy-handed way for greedy control shareholders to eliminate minority shareholders when the corporation is starting to generate cash and build value.

If you want to talk about squeeze-out mergers or would like some help reviewing or drafting appropriate language for your Articles of Incorporation give me   a call.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  This is worth repeating. The State of Ohio Tax Department is stepping up its use tax enforcement efforts against businesses.  But in conjunction with this new enforcement effort, the Ohio Tax Department is offering an amnesty program beginning October 1, 2011 and ending May 1, 2013.  Businesses that enter the program will have to pay use tax back to January 1, 2009, but will not have to pay interest or penalty.   If you want to know more about use tax or the amnesty program, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Immigration Law, Litigation, Arbitration, Mediation

Do I Need my Employees to Sign a Non-Compete?

Whether it is a necessity depends on what they do and who they know.  But not a bad idea to have all your employees sign a non-competition, non-solicitation and non-disclosure agreement as part of the terms of their employment.  Employees often learn confidential and proprietary information about you and your business.  If such information gets into the hands of the wrong people, your business may be injured or destroyed. 

A well-drafted agreement will prevent your employees from competing with your business, soliciting your customers or employees, and using or disclosing your confidential information.  If your employee violates or threatens to violate the terms of the agreement, you can send a cease and desist letter, and then sue for breach if he or she does not comply.  If you have to sue, the court can issue a temporary restraining order, permanent injunction and other legal and equitable relief including monetary damages and attorney fees.

If your employee is using or disclosing your confidential information as an employee, partner or owner of another business, you should notify the other business that the employee is subject to a non-compete agreement.  If the other business continues to employee or be associated with the employee, you can sue the other business for tortuous interference with contractual obligations. 

In the absence of a non-compete agreement, you may be able to find some protection for your confidential information under the Ohio Trade Secrets Act.  But such protection is not perfect and only applies if you can prove your confidential information amounts to a protected trade secret.  More about that in a future blog.  But it is way better, easier and less expensive in the long run to simply have all your employees sign a non-compete, non-solicitation and non-disclosure agreement when you hire them.

If you want to talk about non-competes or need some help drafting one, give me a call.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  Have you ever heard of Use tax?  Use tax is the compliment to sales tax.   You are obligated to pay use tax in Ohio if you buy something out of state and then bring it into Ohio to be used or consumed in Ohio.  The state of Ohio is stepping up its enforcement efforts against businesses.  Joe Testa, the Ohio tax commissioner estimates that hundreds of thousands of Ohio businesses may owe use tax.  The Ohio Tax Department is offering an amnesty program beginning October 1, 2011 and ending May 1, 2013.  Businesses that enter the program will have to pay use tax back to January 1, 2009, but will not have to pay interest or penalty.   If you want to know more about use tax or the amnesty program, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Immigration Law, Litigation, Arbitration, Mediation

How Do I Do a Merger?

When two or more businesses want to combine and move forward as a single entity, it is possible for those entities to merge or consolidate under state law.  Businesses may consider merging for various reasons including obtaining economies of scale and/or possible tax benefits.  To accomplish a merger, the parties need to negotiate, prepare and execute a Merger Agreement, the Merger Agreement needs to be approved by the Board of Directors and/or shareholders of each constituent company, and a Certificate of Merger must be filed with the Secretary of State’s office.   

In a typical Merger, one corporation will be merged with and into the surviving corporation, and the surviving corporation will, without any other act or deed, automatically own all the assets and have all the liabilities of both of the constituent corporations.  The owners of the surviving corporation and the other corporation may receive stock of the surviving corporation and/or cash or assets as part of the Merger.  The Merger Agreement will describe how the Merger is to be accomplished and what the owners of the constituent corporations receive. 

Under state law, Mergers generally have to be approved by a corporation’s Board of Directors and a super-majority of the shareholders.  But if the corporation’s organizational documents so provide, a lesser percentage may be sufficient to approve the Merger.  If you need assistance with negotiating or drafting a Merger Agreement, or have questions about selling or buying a business, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  A squeeze-out merger can be used as a way to eliminate a minority shareholder.  I will have more about that in a future blog.  Please give me a call if you can’t wait.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Immigration Law, Litigation, Arbitration, Mediation

What are Business Valuation Discounts?

When drafting a buy-sell agreement, the owners of a closely-held (non-publicly-traded) company need to consider and agree on how the value of their ownership interests will be determined.   The first step is generally to calculate the value of the entire company.  The second step is then to determine the value per share or unit. 

Some buy-sell agreements require the owners to agree on a value per share at the end of each year.  Other agreements require a third party appraiser or panel of appraisers to set the value each year or upon the occurrence of a trigger event (such as death of an owner).  Still other agreements use an agreed-upon formula such as a percentage of book value or a multiple of earnings or cash flow. 

One of the things that owners often fail to consider and document is whether to apply valuation discounts when setting the value per share.  Business valuation discounts may be appropriate when valuing a minority interest in a closely-held company.  Part of the rationale is that a minority interest (50% or less) is worth less per share than a majority interest (more than 50%) because the minority interest cannot control company decisions.  The other part of the rationale is that interests in a closely-held company are worth less than interests in comparable publicly-traded companies because there is no ready market (NYSE, AMEX, NASDAQ or other stock exchange) for interests in a closely-held company. 

The IRS has allowed business valuation discounts of as much as 35% or more for gift and estate tax purposes.  And independent studies have demonstrated the appropriateness of even higher discounts.  So the value of a minority interest can be significantly reduced if valuation discounts are applied. Whether this is good or bad depends on your point of view.

Whether or not you want to apply valuation discounts in setting the value of a minority interest in your company, it is best to address this issue in the buy-sell agreement so there are no surprises.  If you need assistance with drafting a buy-sell agreement, or have questions about business valuation discounts, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  The Connor Group Foundation is looking for entrepreneurs with a University of Dayton connection who can use a $25,000 to $50,000 loan to get a new idea or project off the ground. The loan terms are very flexible.  You apply for the loan by completing a short application and providing the Connor Group Foundation with a business plan.  If you are interested in receiving an application or finding out more about the loan program, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Immigration Law, Litigation, Arbitration, Mediation

What are Drag Along – Tag Along Rights?

 When a company has multiple owners, there is often a concern that one or more owners could form a control block, and sell out to the disadvantage of the remaining minority owners.  For example, if a company had five 20% owners, each of them individually would be a minority owner and unable to control company decisions.  But if three of these owners banded together, they could decide to sell their interests to a purchaser (perhaps at a premium price) who would acquire a controlling interest and who might be able to “squeeze-out” the remaining minority owners (perhaps at a discount price). 

To prevent this type of scenario, the owners could prepare and execute a buy-sell agreement which contained “drag along – tag along” provisions.  Under the “tag along” provisions, if one or more control block owners received a purchase offer from a third party, the control block owners could not accept such offer unless the other minority owners were given the right to “tag along” and be bought out at the same price and terms.  Under the “drag along” provisions, if the third party purchaser makes an offer to buy all but not less than all of the company stock, the control block owners would have the right to “drag along” the other minority owners and require them to sell at the same price and terms. 

Every company with multiple owners should have a well-drafted buy-sell agreement.  If you need assistance with drafting a buy-sell agreement, or have questions about “drag along – tag along” rights, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  Minority interests in a closely-held company are generally worth less that controlling interests in the same company because minority interests lack the ability to control cpmpany decisions. Interests in a closely-held company are generally worth less than comparable interests in a publicly-traded company because there is no stock exchange or other ready market for sale of closely-held stock.  It is important to consider and agree on how interests in a company are to be valued. Call if you have any questions about how to value interests in your company.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Immigration Law, Litigation, Arbitration, Mediation