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Understanding The Tax and Legal Implications of Selling Your Business

December 19, 2023

Selling a business can be a complex process, and the last thing you want is to fall foul of the law by not meeting all the tax and/or legal compliance requirements. Not only could this derail the sale of your business to a keen buyer, but it could also result in costly penalties and/or legal issues.

So, before you even start the sales process, it’s important to know – and prepare for – these basic tax and legal compliance requirements:

Determine The Structure of the Sale

Before selling your business, it’s important to determine the structure of the sale. Will it be an asset sale or a stock sale? An asset sale involves selling individual assets of the business, such as equipment or inventory, while a stock sale involves selling the entire business, including all assets and liabilities.

The structure of the sale will have different tax implications, so it’s important to consult with a tax professional experienced in mergers and acquisitions (M&A) to determine the best option for your specific situation.

Identify The Tax Implications of Selling Your Business

There will, of course, always be tax implications when selling your business. Depending on the structure of the sale, you may be subject to capital gains tax, income tax, and/or other taxes. Additionally, you may need to file certain tax forms or obtain tax clearance certificates before the sale can be completed.

If you’re not a tax expert, our advice is to outsource to the experts. A qualified tax professional with experience in mergers and acquisitions will ensure that you take advantage of any available tax breaks, minimize your tax liability and ensure all the necessary forms are submitted and/or clearance certificates filed.

You can source a tax professional independently or, if you’re working with a seasoned mergers and acquisitions firm like Woodbridge International, a specialized tax expert can be recommended to you / will be part of the team.

Know The Impact of State and Local Taxes When Selling Your Business

When selling your business, it’s important to consider the impact of state and local taxes because each state has its own tax laws and regulations, and some states may have higher tax rates than others.

Additionally, some states may have specific taxes that apply to the sale of a business, such as a transfer tax or a capital gains tax. It’s therefore important to work with a mergers and acquisitions advisor and/or a tax professional familiar with the M&A tax laws in your state to ensure that you are in full compliance, and to minimize your tax liability.

Identify The Legal Implications of Selling Your Business

Selling your business can have significant legal implications that require a fair amount of legal paperwork, such as drafting a sales agreement, transferring ownership of assets, and addressing any outstanding legal issues or liabilities.

Be warned: failing to properly address these legal issues can result in costly legal disputes down the line! This is why it is crucial that you work either directly with a lawyer specializing in mergers and acquisitions, or an M&A specialist that has a legal team or legal advisor on hand to navigate the legal requirements and ensure that all the necessary documents are in order.

Seek Professional Advice to Ensure Compliance and Minimize Risks

We cannot stress enough how important it is to have experts on your side when navigating the complex tax and legal compliance requirements when selling your business.

If you choose to sell your business direct without a business broker or M&A expert, we strongly suggest you employ the services of a qualified tax practitioner and lawyer with experience in mergers and acquisitions to ensure the process is fully compliant.

Alternatively, you can contract a seasoned M&A specialist that works closely with tax and legal practitioners who guide you through the tax and legal preparation process.

Thinking of selling your business and need guidance? Woodbridge International has 30 years experience assisting mid-sized businesses across various industries to prepare their businesses for sale. If your business has an annual revenue of $5M-plus, contact us today for a free valuation.