Tax Credits Can Lower the Tax Bill From Selling a Business
By Ben Zachariah, Director of Tax Credit Investments, Monarch Private Capital
The sale of a business can generate substantial tax liability. But by investing or purchasing transferable tax credits at a discount, the tax burden can be reduced.
Tax credits are created by governments to incentivize certain business activities that are deemed socially beneficial to communities. Historic preservation, low income housing and renewable energy are all activities that the Federal Government has promoted through the issuance of Federal Tax Credits. To further incentive these activities, many states have created tax credits that offset state taxes in a particular state (state income tax, insurance premium tax, franchise and excise tax). State tax credits are created by individual state’s legislature and vary state-to-state. Tax credits are a direct reduction of tax liability, not a deduction and are not a “loop hole” put together by creative accountants.
Georgia Tax Credits
In Georgia, there are film and entertainment tax credits, low income housing tax credits (LIHTC), and historic rehabilitation tax credits. Georgia’s film industry is estimated to have had a $6 billion impact on the economy in 2015, based on a multiplier.
FILM:
For the Georgia Film, Television and Digital Entertainment tax credits, production companies may be awarded a tax credit up to 30 percent of dollars spent on production in Georgia. If a production company has little or no Georgia tax liability, it can directly transfer or sell its tax credits to another entity or individual. These credits are purchased through a transfer agreement between buyer and seller where price and other matters are stipulated. A transfer tax form, IT TRANS, is filed with the Georgia Department of Revenue to record the transfer. Monarch Private Capital (MPC) acts as a broker between the film company and the buyer. MPC vets all film credit projects to make sure the studio or production company’s paperwork is in order and all certifications have been met and received from the state (DOR). For Georgia film credits, the buyer can purchase credits in the current year, but use them in prior years, as far back at the year the credit was generated.
LIHTC:
The Georgia Low Income Housing Tax Credit Program was established in 2000 and allocates state tax credits to investors and developers of qualified low-income housing developments who reserve all or a portion of their units for low-income tenants. MPC invests in partnerships with project developers to receive the tax credits generated by the low-income housing developments. Thereafter, MPC creates a fund that contains the tax credits. Investors invest in the fund to receive an allocation of GA low income housing tax credits. The credits are reported through a K-1 (partnership tax form). The state tracks all developments earning LIHTCs and which are tracked from developer, through the fund, up to the end user/investor. For LIHTC, the investor must invest in the current tax year to receive the credit. If the taxpayer has excess credits, they may carry them forward for three additional tax years.
FEDERAL:
Federal investment tax credits are offered by the United States government to promote specific types of developments in various fields. Federal tax credits are generally suited for corporations that carry an annual income tax liability of $500,000 or more. Corporations investing in federal tax credits will typically see a substantial internal rate of return on their investment. Additionally, individuals with substantial passive income may also benefit from federal tax credits.
Our team at MPC works with historic rehabilitation, Federal Solar Investment Tax Credit (ITC) and affordable housing federal tax credits. In some cases, the provisions may mirror state regulations, in some cases, not.
In addition to the tax benefits of tax credits, many such investments offer opportunities for positive public relations. When investing in solar tax credits, you help reduce the negative impacts on the environment through the creation of clean power. When you invest in historic tax credits, you restore a lifelong part of the community to vitality and create a new future for historically significant buildings. When you invest in affordable housing credits, you prove to your community that you care about their well-being by creating affordable quality homes. When you invest in film credits you are supporting the arts and entertainment industry which creates thousands of new jobs and boost, the local economy.
Contact us to learn more about how to benefit and make an impact today.
Ben Zachariah is a GABB affiliate and serves as Director of Tax Credit Investments for Monarch Private Capital. Zachariah helps businesses and individuals identify, underwrite, and invest in federal and state tax credit investment opportunities, which afford them the ability to effectively reach and optimize their tax and wealth planning goals. Zachariah works with wealth managers, RIAs, CPAs, attorneys, and advisors to assist them in driving value to their client’s overall financial plans and strategy. Zachariah is a licensed CPA in the state of GA.
Zachariah specifically focuses on individuals with liquidity events, real estate investors, hedge fund managers, private equity managers, high-income earners in general ($1M plus of net taxable income), banks, profitable portfolio companies with cash flow, financial institutions and trust companies, insurance companies, and corporations with federal and multistate federal tax liabilities.
Zachariah has facilitated the placement of over $70M federal and state credits since joining the firm in 2016.
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How Fairness Opinions Protect the Sale of Businesses
Since one often hears the term “fair value” or “fair market value,” it would be easy to assume that “fairness opinion” means the same thing. A fairness opinion may be based to some degree on fair market value, but there the similarities end. Here’s what a fairness opinion is and how it could affect the sale of a business.
Assume that you are president of a family business and the other members are not active in the business, but are stockholders. Or you are president of a privately held company that has several investors/stockholders. The decision is made to sell the company, and you as president are charged with that responsibility. A buyer is found; the deal is set; it is ready to close — and, then, one of the minority stockholders comes out of the woodwork and complains that the price is too low. Or, worse, the deal closes, then the minority stockholder decides to sue the president, which is you, claiming the selling price was too low. A fairness opinion may avoid this or protect you, the president, from any litigation.
A fairness opinion is a letter, usually only two to four pages, containing the factors or items considered, and a conclusion on the fairness of the selling price along with the usual caveats or limitations. These limitations usually cite that all the information on which the letter is based has been provided by others, the actual assets of the business have not been valued, and that the expert relied on information furnished by management.
This letter can be prepared by an expert in business valuation such as a business appraiser or business intermediary. The content of the fairness opinion letter is limited to establishing a fair price based on the opinion of the expert. It does not provide any comment or opinion on the deal itself or how it is structured; nor does it contain any recommendations on whether the deal should be accepted or rejected.
Fairness opinions are often used in the sale of public companies by the board of directors. It helps support the fact that the board is protecting the interests of the stockholders, at least as far as the selling price is concerned. In privately held companies, the fairness opinion will serve the same purpose if there are minority shareholders or family members who may elect to challenge the price the company is being sold for.
Are You Asking a Reasonable Price for Your Privately Held Company?
You’ve spent a lifetime building up your company, so when it’s time to sell, you naturally want top dollar for it.
But is your company worth what you think it is?
Placing a price on a privately-held company is usually more complex than placing a value, or a price, on a publicly-held company. This is primarily because privately held companies don’t have audited financial statements.
Why are Audited Financial Statements Lacking in Privately-Held Companies?
Preparing an audited financial statement is expensive and, as a result, many companies that have not gone public simply forego the expense. On the other hand, publicly held companies reveal much more information regarding their finances as well as a range of other kinds of information.
Compared to a privately-held company, a publicly held company can often seem like an “open book.” Buyers are left with the proposition of having to dig out a lot more information from a privately-held company in order to assess whether or not a valuation or price is accurate.
What Can You Do to Overcome this Factor?
You, as the seller, can help streamline this process. By having as much information available as possible and having your accountant make sure that your numbers are presented in a manner that is easy to understand and follow, you will increase your chances of selling your business.
Experts agree that there are several steps a seller of a privately-held company can make when he or she is establishing a price or a value. First, use an outside appraiser or expert to determine a value. Next, establish what your “go-to-market” price is. Third, know your “wish price.” A seller’s “wish price” is the price that he or she would ideally like to see. Finally, it is critical that sellers establish the lowest price that they are willing to take. You should know in advance how much you are willing to sell for as this can help a negotiation move along.
The Marketplace Will Ultimately Decide
It is common that the final sale price for the company be somewhere between the asking price and the bottom-dollar price established in advance by the seller. Yet, it is important to note, that on occasion a selling price may, in fact, be lower than any of the four we’ve outlined above. At the end of the day, the undeniable fact, is that the marketplace will establish the final sales price.
Here are a few of the areas that you can expect a buyer to review when establishing the price that he or she is willing to pay: stability of the market and stability of earnings, the potential of the market, product diversity, the size of the customer base, the number and seriousness of competitive threats, how broad the customer base is, the relationship with suppliers, the distribution network in place, needs for capital expenditures and other factors. The more favorable each of these points are, the more likely it is you’ll receive a higher price.
Copyright: Business Brokerage Press, Inc.
Read MoreExamining the Mind of the Serious Buyer – Five Points to Consider
Are you looking for a way to perfect your presentation? Understanding what the typical serious buyer wants will help you get your business ready for selling.
Let’s turn our attention to looking at what these types of individuals and entities really want. After all, your time is precious.
1. An Interest in the Industry
First, prospective buyers will want to have a better understanding of your industry. Any serious buyer will want to understand the industry as a whole, as well as your existing customers, prospective customers and the strengths and weaknesses of your business. Key factors, such as threats from competition, will also be a major factor for prospective buyers.
2. Seeking Knowledge about Discretionary Costs
Secondly, expect buyers to take a long look at discretionary costs. Sellers will often look to reduce their expenses in a range of discretionary areas including advertising, research and development and public relations; this is done to help make a business appear more attractive to a buyer. However, it is important to note, that a savvy prospective buyer will notice reduction in discretionary expenses.
3. Inquiries about Wages and Salaries
Wages and salaries is another area that receives attention from buyers. If your business is paying minimum wage or offers a limited retirement program then employee turnover is likely to be high. Buyers may be concerned that employee stability may be low, which, of course, can potentially disrupt business.
4. Questions about Cash Flow and Inventory
No serious buyer will ignore the issue of cash flow. Any prospective buyer will want to know that the business they are considering buying will continue to generate profits both now and in the future.
Inventory is another area that will not be ignored. If your business is carrying a large amount of antiquated, unsalable or simply unusable inventory, then expect that to be factored into a prospective buyer’s decision-making process. It is best to disclose such inventory instead of hiding it, as it will be discovered during due diligence.
5. Seeking Capital Expenditure Details
Finally, capital expenditures will be examined by buyers. You can expect buyers to carefully evaluate machinery and equipment to ensure that there will be no expensive surprises looming on the horizon.
These give areas are definitely not the only areas that buyers will explore and investigate. Everything from financial agreements and environmental concerns to government control will be examined in depth. You should invest some time thinking about the situation from the perspective of a buyer, as this will help you discover many potential problems and try to secure viable workarounds. Working closely with a business broker is another way to ensure that you can successfully anticipate the needs of buyers.
Copyright: Business Brokerage Press, Inc.
Read MoreIf You’re Selling Your Business, Expect the Unexpected!
Many experts say the best time to prepare to sell your business is when you start your business. Few business owners reach that level of preparedness. Most business sales are event-driven. Factors such as problems with a partnership, health issues, burnout or even divorce can drive a business owner to sell.
Once you’ve made the decision to sell your business, know this: Unexpected events and factors will always rise to the surface. In this article, experienced business brokers offer advice on four key questions that you’ll need to answer before selling your business.
1. What is the Value of Your Time?
Meeting with prospective buyers can be a serious time sponge. One of the key benefits of working with a business broker is that a broker can take some of the pressure off of you. They can interact with buyers on your behalf.
A large percentage of business owners are also deeply involved in the day-to-day operation of the business. Business owners don’t have time to meet with every interested party or take the time to weed out the qualified prospects from the window shoppers.
2. What Do You Want Your Level of Involvement to Be?
Working with prospective buyers is obviously time consuming, but so is knowing every detail about a prospective buyer’s visit. A seasoned business broker can sift through what information is essential and what information is extraneous. In this way, you only hear about what is relevant and can skip the rest.
It is important for business owners to keep in mind that buyers expect that the business will continue to run successfully not just during the sales process but through closing as well. For this reason, you’ll want to stay as focused on the day-to-day operations of your business as possible; after all, if a deal falls through the last thing you want is to have a dip in revenue.
3. Are There Other Decision Makers?
Determining whether or not there are any other decision makers is a very smart move. Part-owners and silent partners will have to be addressed when it comes time to sell. They likely will have to agree to terms of the sale before the deal can go through. Be sure to talk to them before finalizing any deal. Professional business brokers can help you negotiate with these decision makers.
4. Just How Important is Confidentiality to You?
Confidentiality is important when it comes to selling your business. The more active your selling process, the greater the chances are that you’ll have a leak if you’re not extremely careful. Leaks unfortunately occur more than you might think.
How much will this issue negatively impact your business if it does occur? You should have a “leak plan” ready to go. In your plan, you should have in place what steps you should take to minimize the damage caused by the leak. Being ready to deal with key customers, employees and distributors is the cornerstone of dealing with any leak. Business brokers are experts at helping clients maintain confidentiality. This can save you a great deal of time and effort on many fronts.
By answering these four questions fully, you will save yourself time, stress and effort. Selling a business is a complex process. But with the right planning, you can minimize your effort and maximize your results.
Copyright: Business Brokerage Press, Inc.
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