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Selling Businesses Is Not the Same As Selling Real Estate

There is a danger in treating the sale of a business the same way as the sale of real estate. Many business owners think of it as the same process but when you take a closer look you will see great differences and will understand why treating business buyers as property buyers is a trap to be avoided at the all cost. Lets examine the important differences and what a seller should do to compensate or take advantage of each of them

1. In most cases of property sale, the vendor and purchaser don’t meet. While in the sale of a business, the owner of the business is a crucial part of the business sale. The owner is essential for the introduction of buyers to the business during the sales process and when the business sale takes place, the owner plays a big role during the business handover to the new owner.

That’s why it is paramount that the owner and the buyer establish a good relationship. In some cases, depending on the size and complexity of the business a longer handover may be needed, and it would be difficult for the buyer to believe that she or he can successfully take over the business and sustain the profits if the seller is not cooperative or they simply they don’t get along.

2. When purchasing property, buyers normally have decided to buy the house, then only need to decide which house they going to buy. When buying a business, buyers have the desire of owning a business, the decision to buy a business and to which particular business to buy happen simultaneously. While selling the business you have to present the business in a way that clearly shows both the risks and benefits to the potential purchaser. Present and give to the buyers all the documents and information required to evaluate the business. Create processes and do as much as you can to ensure a successful takeover of your business by the new owner

Doing this will give more confidence to the buyers and will help them make the decision to buy your business

3. Selling Real Estate is all about marketing and attracting buyers to your property. Selling business is not only about attracting buyers to your business but even more than that it is about presenting your business to the buyers and devising a plan of handover of the business that will help the future owner continue operation of the business without interruptions and with continued success. Before putting the business on the market, owners of the business should take actions to reduce the reliance of the business on themselves as much as possible. This will not only increase the likelihood of a successful sale but also increase the sale price of the business as well.

4. Real estate purchasers can supplement their funds by borrowing from the bank. It is not so easy to borrow money against a business. In some instances owners of the business should be prepared to enter into a payment arrangement or provide vendor finance in order to secure the sale of the business.

5. When you are selling a house the only competition on the market are other houses. Business sellers are competing against other businesses, other forms of investment (Property, managed funds, share investments etc.), buyers starting a business from scratch and even not buying a business at all. When pricing the business you must not only look at other similar businesses on the market but also you have to keep in mind other investments and options available to buyers.

So, due to the intangible nature of business and the reliance on the owner in most SMB’s, a business sale is a much more complex process than selling real estate, recognizing this is the first step to a successful sale of your business.

Alternative Minimum Tax Impact From Investing Activities

Income that is earned from investments is a significant factor in the amount of Alternative Minimum Tax an individual pays. Certain types of investment income (dividends, capital gains, certain interest, e.g.) as well as the amount of this income in relation to the taxpayer’s other income, all factor into the AMT formula. A taxpayer usually has much more control over investment income than he does his salary, for example, making this source of income much more important from an Alternative Minimum Tax planning point of view. In general, an investment portfolio can be changed any time a taxpayer finds it advantageous to do so.

Discussed below are a few key items associated with investing activities, and the AMT planning opportunities that may exist.

Dividends and capital gains

Most dividends on common stocks are “qualifying,” and, thus, are eligible for a lower tax rate than “ordinary income,” which consists of things such as salaries and wages, interest income, rental income, and the like. Similarly, a capital gain that qualifies as a “long-term” capital gain also is eligible for this lower tax rate. Even though the tax rate on dividends and capital gains is the same for both the Regular Tax and the AMT, the effect on a taxpayer’s exemption amount can mean that these items of investment income are the reason a taxpayer is paying the AMT.

Planning strategy – determine the real tax rate being paid on dividends and capital gains. For maximum returns, investors should always consider after-tax yield when evaluating investment alternatives.

Tax-exempt bond interest

In general, municipal bond interest is exempt from Federal tax. However, certain muni bonds are designated “private activity” bonds, depending on how the proceeds of the bond issuance are used. Interest from private activity bonds continues to be exempt for the Regular Tax, but it is fully taxable for the AMT, with the result that the after-tax yield is significantly less than what the taxpayer originally thought he was earning. Note that, in order to boost yields, certain muni bond funds may allocate a portion of their portfolios to private activity bonds.

Planning strategy – Again, a taxpayer always should be considering after-tax yield in evaluating investments. An AMT payer generally should not be holding private activity bonds. If the investment is in mutual fund form, there are plenty of muni bond funds available that do not invest in private activity bonds.

Partnerships and other “pass-through” investments

In many cases partnerships themselves will have AMT items, but since a partnership “passes through” these items, it is the individual partner who ends up paying the AMT. For example, a real estate partnership may use a depreciation method that is allowable for the Regular Tax but is not allowable for the AMT. This difference in depreciation methods is an AMT item that will be reported to the partner on the Form K-1 he receives from the partnership, which, in turn, must be reported on the partner’s own AMT schedule, the Form 6251.

Note that this same pass-through treatment results in the case of S corporations, LLCs, and certain estates and trusts.

Planning strategy – Before investing in a partnership, an individual should inquire about AMT items that the partnership may generate. Once invested, it generally is too late to do anything about them.

Conclusion

While the old maxim that taxes should not determine an investment strategy is true, nevertheless an investor who is stuck in the AMT may be earning a significantly lower after-tax yield on his investments than he realizes. Remember that it is only after-tax income that an investor actually gets to keep; ignoring taxes, especially the AMT, is unwise.