Startups · Strategy

What are the typical tax issues that founders need to worry about when selling their company?

Yana Podskrebalina QA Test Engineer at Woact Company

November 29th, 2016

I am thinking of selling my company. It is a small IT startup, which will hopefully be acquired by a bigger IT company that I am in contact with. I don’t have much knowledge about company acquisition and I will for sure get some help. In the meantime I would like to find out first hand, if possible, what are your thoughts on the most typical tax issues when selling your company as a founder.

Roger Royse Royse Law Firm

November 29th, 2016

If youare organized as a C corporation, you will want to structure the sale as a sale of stock (not assets) to ensure that you have only one level of tax at capital gains rates. If you have qualified small business stock, you may be able to avoid or defer the gain altogether. If you are an S corporation, LLC or sole proprietorship, your main issue will be allocating consideration to goodwill and other capital assets to maximize the lower taxed capital gains portion of the deal. Finally, if you are exiting in a stock for stock transaction or some types of mergers, you may be able to avoid tax on the non cash consideration. This is complex so make sure you get tax (not just legal) advice.

Ian Shearer Executive Chairman at Parakeetplay

November 29th, 2016

Yana. The most important tax issue comes around whether you are selling the business of your company (as in the assets) or whether you are selling the company (as in the shares in the company). In my experience a bigger It Company will generally not want to buy the shares in a small company because then they have to do due diligence etc. In addition the legal agreement will lengthen greatly as they have to include reps and warranties (or equivalent). So the bigger company will generally say "we will just buy the business, not the company" But this can mean that the Company can have a tax bill and then when you distribute the cash from your company to yourself, you have another tax bill. In effect you can be taxed twice. It depends on the tax rules of your country. You need to talk to a local tax adviser about this.

Martin Omansky Independent Venture Capital & Private Equity Professional

November 29th, 2016

Contact the Exit Planning Exchange at Babson College, Wellesley, MA. They are a non-profit group of professionals that specialize in all aspects of company sales. The group is the real deal, and you can get the straight poop from them. Sent from my iPhone

Michael McNamara CEO at Adapt-IP

November 29th, 2016

Hopefully you did things ok when you started the company, that set you up for this eventuality.. Key would be that you filed the federal form 83b that details how you want to treat the gains from vesting into any stock grants. Also important would be to have had some change of control protection that lets key folks accelerate some vesting in this eventuality; as perhaps while they were key in the existing company, they might be redundant in the new setup. Of course you do have what you have, so must move forward with that. The above advise is more for folks reading this thread, alerting them to do the right thing for such a happy event. For you, it is important to look at the terms of the transaction so that you get the tax position that makes best sense. Again, talk to your tax adviser; none of us can know. But basically, if you are bought out now for cash, you have the certainty that you are getting the cash value now; but also have to pay the taxes now. If you are bought out for now for stock, and the acquirer is not a public company, you defer paying taxes on gains until you (can) sell; but incur the risk that the new operation doesn't do so well, and hence get less than you would have had it been a cash deal. If you are bought our by a public company in a stock deal, in a typical transaction, you a perceived by tax authorities to have a gain on the date of the deal by the tax people; but can't sell stock to cover the tax bill until after regulators approve the deal. The price of their stock could be quite different between these two points, which would be in your favor, or to your loss. So, congratulations on getting to a successful exit; and pay good advisers who can look at your details and give you specific recommendations. (Basically, don't depend on free advise from a dude on a web site :-) )