Tax Implications: Goodwill in a Sale (Business Valuation Expert Nashville and St. Louis) http://www.ValuationPodcast.com (314) 541-8163
Hi Welcome to ValuationPodcast.com – A podcast and video series about all things related to business and valuation. My name is Melissa Gragg, a company valuation expert in St. Louis Missouri.
During this episode we will discuss Tax Considerations in Private M&A Transactions.
We have the privilege to discuss these issues with a tax accountant and fellow business valuation expert in Franklin and Nashville Tennessee – Brad Smith.
Tax Considerations in Private M&A Transactions.
Questions often asked by the seller:
1. What are the tax consequences of selling the enterprise?
2. What is a “purchase price allocation” and how does it impact the transaction?
3. I understand that “goodwill” is a component of my company. What are the tax implications of goodwill in the sale?
4. The buyer wants to include an “earnout” in the terms of sale. What are the tax ramifications?
5. The buyer wants to include a “seller note” in the terms of the sale. What are the tax ramifications?
6. They buyer wants to include a noncompete and assign it a value. What does this mean from a tax perspective?
7.I am a shareholder/member in a private company. My fellow shareholders/members are willing to buy/redeem my interest so I can retire. What are the tax consequences to me?
CVA, MAFF, CDFA
Expert testimony for financial and valuation issues
Bridge Valuation Partners, LLC
Cell: (314) 541-8163
Brad Smith, CPA, ABV, CVA, IAR
Smiley, Smith, Wynd, LLC
1650 Murfreesboro Road-Hwy 96 E.
Franklin, TN 37067
Hi, welcome to valuation podcast.com, a podcast and video series about all things related to business and valuation. My name is Melissa Gragg, and I’m a company evaluation expert in St. Louis Missouri. During this episode, we will actually discuss tax considerations in private company transactions. So we have the privilege to discuss these issues with a tax accountant and business valuation expert in Franklin and Nashville, Tennessee, Brad Smith. Welcome Brad.
Hi Melissa. Thank you for having me.
The Goodwill is, is basically what’s left over a lot of times, right. So it just comes you know, and so I think most people conceptually have an idea of what Goodwill is or that it’s a component of the company, but what are some of the tax implications of Goodwill in the sale of a company?
Sure, sure. So like you mentioned, if, or if Goodwill is organic, meaning it’s, it’s been internally created the business owners, aren’t seeing it on their balance sheet. It’s not something that the accountants have posted and that there’s no line item unless they purchase the business. There’s, there’s generally no Goodwill on the balance sheet. Hopefully the Goodwill is the largest asset they have in their purchase price allocation. Does that means there’s tremendous value that’s being transferred to the seller. So the, the good news is that for the seller, Goodwill is a capital asset. So it’s it’s for federal tax purposes. It is going to be granted long-term capital gain treatment under current rates, 15 and 20%. So that’s, that’s about the best we can hope for, with respect to companies and various States. There can be some planning opportunities with Goodwill and one potential is bifurcating Goodwill into a business component and a personal component. And so depending on the engagement and the the location of the company in Tennessee, for example, there is opportunity. If we can isolate that personal Goodwill, while we get the same federal tax outcome, we might save a tremendous amount of dollars in state tax. So I’ve done deals in Florida and in Tennessee and Florida, that’s kind of a neutral issue, but in Tennessee, it is an issue and it is something that we have to actively pursue.
And part of this is understanding the difference between personal Goodwill, which is kind of attributed to the owner and enterprise or company Goodwill. And there’s a lot of different terms for it, but in essence, it’s com it’s Goodwill that is associated to the company, its reputation, it’s client relationships, all of that type of stuff that we’re trying to distinguish because there’s tax advantages for it being personal Goodwill, as opposed to corporate groups.
Well, correct. And, and from a buyer perspective Goodwill is required to be treated a certain way on their books. So regardless of the business or personal classification that we end up assigning it for purposes of the transaction th the buyers in the same position.