Salt Lake City was referred to as the “Center of Scenic America.” Since the early part of the century, when the “See America First” movement was founded in the city, community leaders had promoted it as a tourist destination. It was not hard to find a place to stay in Salt Lake City since motels lined Highways 89 and 91, which ran north and south along the Wasatch Front. Motels sprang up along Second West and State and Main Streets because they were the major arteries through the city. Highway 40 continued its way east at Twenty-first South Street, and some motels did cater to travelers along that route.
As Salt Lake City became a common tourist destination, the number of motels increased. In 1947 the Salt Lake City directory listed thirty-six hotels (some of them residential like the Belvedere) and sixty-two lodging houses, many of them small tourist homes akin to today’s bed-and-breakfasts. None of them used the label motel; nearly all were listed as hotels. A decade later, the 1957 directory listed lodging under two headings: hotels, and motels and auto courts. The number of hotels had risen from thirty-six to eighty-six, and the number of motels and auto courts nearly doubled to a total of 109. Of these nearly all chose the name motel or motor lodge, which implied a larger motel with a coffee shop. Later on the number of motels decreased and many motel owners put their motels up for sale. If you are considering selling your business in Salt Lake City or considering buying a business that is up for sale in Salt Lake City, speak to an expert Salt Lake City Corporate Lawyer. There are many pitfalls in buying and selling a business. To succeed in the sale or purchase, you need to avoid these pitfalls.
Selling the Business outside the Family
A business has been built over the years. The children have developed their own careers. The owner’s spouse has seen more than enough of this business and would like both of them to retire. This situation is not unusual; it is the norm. Of every one hundred family-owned businesses, by far the dominant form of business throughout the world, only a third are transferred to the next generation of the owner’s family. As most closely held businesses are family owned, this simple statistic reminds us that two-thirds of them change ownership through sales to outsiders, or through dissolution and sales of assets. These sales should be arranged to obtain as much after-tax money as possible for the owners with as little risk as possible.
The first critical question for a buyer is: “Why is this firm for sale?” The second is like unto it: “Who is selling?” The answers to those questions may significantly affect the value a buyer would have to pay, and the negotiating strategy most likely to be effective.
Company Estate Sales
In an estate sale, for example, when the owner/manager has died and no one from the family is taking over, trustees will liquidate the estate’s assets. In many cases, the trustees will not be industry-knowledgeable. That means they may be little help in providing useful information about industry trends, historical meanings of financial records, hidden assets, and so on. Due diligence will need to be more exhaustive, rely more on employees, and be more exposed to competitors. In other words, the risks will go up, and hence the value is likely to go down along with the price. It is also possible that the trustees will be willing to accept a lower price to have a clean, all-cash transaction that allows them to close the books on the estate and distribute the funds to the beneficiaries.
Conversely, some trustees or inheritors are emotionally wedded to their family’s firm, without having the business acumen to understand its value to the buyers—or the expertise to run it competently themselves. They may sell for less than it is really worth, or hold out for more than buyers will pay, eventually damaging the firm’s value that way as well. In both cases, a buyer faces the prospect of having to educate the seller, and that education is likely to have a price as well—if the buyer is even willing to supply it.
Business Retirement Sales
When the owner is retiring in good health, however, the circumstances change. He or she may be available to help with a transition, may even need the emotional progression associated with a gradual change in status. He is likely also to have valuable expertise about the inventory, other assets, employees, suppliers, and customers. If those values can be incorporated in the sale, new owners are likely to pay a higher price, because they would be receiving a more valuable, less risky package. Transition roles, staged payments, performance guarantees, expert consulting, training contracts, and other features may come into play as part of the transfer process. They are likely to affect both price and terms. They do provide many additional ways for the parties to transfer (or withhold) value.
Carefully consider what kind of buyer is the best fit for the business being sold and vice versa. Bad fits will cost both parties money, and often lead to “walk-aways” instead of successful deals. A well-prepared buyer has to know what she has to offer, and what she needs, or what it will cost to buy those additional resources. Then you can begin a useful search and head into negotiations with a workable plan.
Conversely, a smart seller has to target the sale for a market where several possible buyers exist, so some form of auction can be started and the business will be sold to the buyer willing to pay the most. When a sale is targeted for a market of one, the buyer has all the negotiating power. Worse, when the sale is targeted for a market with no likely buyers, not only will a sale not happen, but the value of the business will likely be damaged by a selling period with no takers, and the eventual sale price will be further reduced as perceptions of a damaged property accumulate.
In most markets, there are sources of capital available for a kind of intermediary financing. A third party could have been found to provide the cash the seller needed to exit the deal, in return for the repayment of that investment by the cash-strapped buyer. Neither party had the financial acumen or networks to find such an intermediary. Hardly anyone would think of buying a house this way. We almost always use mortgage financing to allow us to buy a much more valuable house than we could afford in an all-cash deal. The seller of the house gets cash, and the buyer pays down the mortgage over time. Without mortgages and professional real estate brokers, the housing market would be severely constrained. Similar facilities exist in business markets.
The Art of Know What You Are Getting
The first and foremost principle in buying any business is to understand what is really being bought. This includes both tangible and intangible assets. Besides the positive assets, the transaction should also address the existing liabilities that the buyer would have to assume and possible future ones inherent in the deal. It is important to value both assets and liabilities in terms of what it would cost the proposed buyer to replace them. In doing that, one must be careful not to use their book or historical cost accounting values—particularly for real estate—although the history of those book values may be very useful in discovering hidden assets. The firm’s specific assets should be examined and assessed, even if the firm will be valued as a going concern, to be sure these things are as they appear, or at least so the buyer does understand what they represent.
Structuring the Business Sale
One of the important things to consider when structuring the sale is the tax implications. Both the seller and the buyer will have certain tax implications arising from the transaction. An experienced Salt Lake City Utah corporate lawyer can help you structure the sale to deal with the tax implications.
Sellers usually try to structure sales to get the most money, as soon as possible, after taxes. This objective requires careful planning in organizing the business for tax purposes well before it becomes time to consider selling. There are two basic ways that a closely held firm can be structured for taxes. It can be operated as a regular C corporation, which pays taxes as a business before its shareholders pay again on any dividends they receive. Alternatively, the firm can be formed as a single-tax entity, such as a partnership, or Subchapter S corporation. More recently, owners have the additional option of using a Limited Liability Company (LLC) or Limited Liability Partnership (LLP), in which all profits annually flow through to the owners, who then pay the taxes at their personal income tax rates.
At first glance, paying taxes once sure looks better than paying taxes twice. But one must look closely. When taxes are paid twice (regular or C corporation), all the wages and benefits paid to the owner/manager are tax-deductible (for the business)—including medical insurance and contributions to retirement plans. These benefits must also be made available to all employees, however, not just the controlling shareholder, to be deducted by the corporation. Furthermore, the IRS goes to great lengths, particularly with retirement plans, to make sure that they do not just benefit the highly paid workers in a firm, a group that most obviously includes the owner/ manager. Although they can be deducted from taxable income as business expenses, those employee benefits are still expenses, still costs to the business. Do they pay for themselves in reduced taxes and increased employee morale, productivity, and loyalty? That’s the trade-off.
Limited Partnerships
Another option to minimize taxes when transferring ownership is to use a limited partnership. This technique only works when the children do not want to run the business. If they are materially participating in the firm’s operations, the IRS will not recognize this form of transfer for its favorable tax treatment. The original owner/manager remains the general partner, still running the business. Children receive ownership positions, with a minority interest discount even when they have over 50% ownership. Once the ownership position is transferred, the entire business is sold, triggering capital gains treatment.
Good advice on tax strategies is always recommended. U.S. tax laws change frequently, and the Internal Revenue Code has become very complicated. After-tax wealth is one of the primary objectives of a sale; good advisors can be very valuable in helping owners reach that objective. Conversely, bad advice, or aggressiveness to the point of fraud, can be very expensive. Therefore, one should check with an expert on trusts for the latest rulings and corresponding IRS treatment before proceeding. Any lawyer can point to at least a dozen cases in which large sums of money — in taxes and legal and accounting fees — could have been saved if only question had been asked, a single phone call to an expert made. Speak to an experienced Salt Lake City Corporate Lawyer. The lawyer can help you structure the sale or purchase depending on whether you are buying or selling the business.
Whether you are the buyer or the seller of a business, you will need sound legal advice. As a seller you need to be aware of what you are selling and as a buyer you need to be aware of what you are getting in return for the money you are shelling out. There is also the tax implications to be considered. As a buyer, you must conduct proper due diligence before you sign the contract. The last thing you want is to be straddled with liabilities that have nothing to do with you. Speak to an experienced Salt Lake City Utah corporate attorney and get invaluable advice.
Free Consultation with a Corporation Attorney in Salt Lake City
When you need legal help with a company in Salt Lake City Utah, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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