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www.fueloilnews.com | FUEL OIL NEWS | SEPTEMBER 2015 29 BUSINESS OPERATIONS BY STEVE ABBATE AND SEAN COTA W hen we speak with clients looking to buy or sell the assets of a C-Corp, we would hate to be the bearer of bad tax news. While today the news is still not great, it is a lot better than it was several years ago for reasons we will go into in this article. We continue to be surprised at the number of companies we advise that are still C-Corps. Owners of C-Corps who work to build their business and then decide to retire and or transition their business can end up having to pay more than half the selling price to the govern- ment in taxes. In contrast, owners of S-Corps or LLCs typically pay almost half the taxes of a C-Corp in an asset sale. If you are a C-Corp looking to transition your business or if you are a company looking to acquire the assets of a C-Corp, there are some strategies you can use to help lessen the tax burden. The first step is to consult with your accountant and a tax attorney. We have worked with several of them and we have some tips for you. As a C-Corp when you sell the busi- ness assets, the corporation is taxed on the gain on the sale of those assets. This includes assets such as customer list, trucks, propane tanks, tools, inventory, offices, bulk plants, etc. Since hard assets have likely been substantially depreci- ated and there is little or no cost basis on the customer list, the corporate tax on the gain is substantial. Even if you sell stock, the buyer will likely want to elect to revalue the assets (338 Election) and this will essentially negate the tax advantage of a stock sale. In our industry almost all sales under $10 million are asset sales. Secondly, when the net proceeds, after corporate tax, flows through the C-Corp, the pay- out to the stockholders are taxed again at personal income tax or dividend rates. Effectively, this is your double taxation. Changing to an S-Corp is relatively easy but it takes a long time. The conver- sion time has fluctuated from 10 years to five years and back to 10 years, where it is now. Many owners looking to retire or transition do not want to wait 10 years so if you are not ready to retire, the time to convert is now. If you are ready to transi- tion your business now, there are some strategies which may help. ICE CREAM LED THE WAY In 1998, The Martin Ice Cream Co. chal- lenged the concept of double taxation with regard to the personal goodwill of the owner. They contended that a substantial amount of the goodwill of the company was the relationship of the owner and not the corporation and therefore there should not be a corporate tax on the owner's goodwill. The court agreed and the concept of selling personal goodwill was born. Seventeen years later the landmark case has taken root and it has been chal- lenged and frequently upheld in several court cases although some cases failed to prove personal goodwill due to lack following proper guidelines. You should always check with a tax attorney who has personal goodwill experience before taking any tax advice regarding personal goodwill. For the clients we worked with, they were advised that the best method of assuring a personal goodwill declaration is upheld is to first have a certified personal goodwill valuation. This will determine what percentage of the goodwill of your business is yours and what percentage is the companies. This will also help you determine after tax proceeds. Some factors valuation analysts look for are the owner's involvement with customers, the owner's name use in the business and the overall customer con- tractual obligation with the company. The less of a contractual obligation the more personal goodwill. The valuation analyst will also check to see if the corpo- ration has a non-compete in place with the owner (rare in our industry). If there is a non-compete in place then personal goodwill cannot be used. The other method to protect your per- sonal goodwill declaration is to have the buyer of the business purchase the per- sonal goodwill directly from the owner as a separate transaction apart from pur- chasing the other assets of the business. Most buyers do not object as both of the goodwill purchases are amortized at the same rate. In a recent transaction where we worked with the owner of a C-Corp, he was able to get the net effective tax rate down from over 60% to under 45%. That is still a big tax bill compared to an S-Corp rate of around 33%, assuming state capital gains and capital recapture on hard asset sale. RECOMMENDATIONS 1. Consult your accountant AND a tax attorney. 2. If you are looking to acquire a C-Corp, make sure the owner gets profes- sional advice because it may kill the deal when the owner sees the net proceeds if personal goodwill is not considered. 3. If you are a C-Corp, convert now (after understanding how this may affect you) regardless if you have a transition plan or not. 4. If you are a C-Corp and you want to sell your business, seek professional help to get you through the process and to minimize taxes. Remember to use the right professionals and not just the ones you have always used. Steven Abbate the president and Sean Cota a managing director at Cetane Associates, which provides hands-on merger and acqui- sition advisory services for privately held companies. Cetane Associates LLC 4504 Stonecrest Drive Ellicott City, MD 21043 410-480-4930 office 410-404-3199 cell www.cetane.net C-Corp Transactions C-Corp, S-Corp and how the taxes play out l F O N