Tips For Selling AFranchised Business (Part 2 of 2)
By Cliff Ennico
www.creators.com
Now that you have the information you need from your attorney in orderto sell your franchise territory to a neighboring franchisee, here aresome of the questions you will need to ask your accountant:
(1) How should the purchase price beallocated for tax purposes?nbsp;When you buy a business of any kind (franchised or otherwise), you areacquiring a lot of different assets - equipment, inventory, accountsreceivable, motor vehicles (maybe), intellectual property such aspatents or copyrights, and goodwill.nbsp; Under IRS rules, these alldepreciate at different rates, and both you and your buyer have to tellthe IRS (using IRS Form 8594, available at www.irs.gov) how much of thepurchase price was used to purchase each type of asset.nbsp; This iscalled "allocating the purchase price for tax purposes," and is bestdone by having your accountant speak directly to your buyer'saccountant and agree on how best to allocate the purchase price.nbsp;Make sure you do this before you sell the business, as people tend toforget about it afterwards.nbsp; As long as you and your buyer tellthe IRS the same story about how the purchase price will be allocated,life is beautiful.nbsp; But if you and your seller tell the IRSdifferent stories about how the purchase price was allocated, then bothof you will be audited.nbsp; Not a good thing.
(2) Are all of my tax returns up todate?nbsp; Your buyer will want tosee copies of your most recent income tax, sales tax and other taxreturns, but you will have to file "bringdown" tax returns for theperiod beginning on January 1 of this year and ending on the date yousell the business.nbsp; If those returns show that your business hasdeteriorated when compared to the same period last year, there#146;s a goodchance the buyer will want to reduce the purchase price based on yourmore "up to date#148; information.
(3) Will sales or other taxes be dueon the machinery, equipment andother physical assets I will be selling to the buyer?nbsp; Manystateshave a "bulk sales" law that requires the buyer to pay sales tax on thetangible assets (always the equipment and machinery, maybe theinventory, but never the goodwill) you are selling to him.nbsp; Thisis another reason why the "allocation of purchase price" (describedabove) is so important.nbsp; The more of the purchase price isallocated to tangible assets such as equipment, the more sales tax yourbuyer will have to pay when you sell the business.nbsp; Some statesalso have "personal property taxes" and "floor taxes" on specificassets that will have to be paid when you close the sale.nbsp; Eventhough it is the buyer's responsibility to pay these taxes, you andyour accountant will be asked to do whatever you can to minimize thesetax obligations as a condition to getting the deal done.
(4) Will the state government requirea portion of the purchase price tobe "escrowed" for any unpaid sales taxes?nbsp; When you selltheassets of a business, the buyer is not subject to any debts,liabilities or obligations the seller has incurred except for those thebuyer assumes in writing.nbsp; The one exception to that, in manystates, is unpaid sales taxes.nbsp; If you have not filed all yoursales tax returns when they were due, or if you owe sales taxes, thestate can sue your buyer to collect these even though you sold only theassets of your business, not the business itself.nbsp; Because theexact amount of your sales tax liability will not be known 100% beforethe closing, it is customary for your attorney to hold a portion of thepurchase price in escrow until you have filed all of your sales taxreturns through the sale date, paid all your sales taxes, and receiveda "clearance certificate" from your state tax authority saying they aresatisfied and won#146;t go after your buyer.
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You can ask your state tax authority to determine the amount to be heldin escrow or, if that is not possible, you can calculate the escrowamount as follows: take the arithmetic average of the sales taxesyou actually paid each month for the last six months, multiply thataverage by three, and escrow that amount when you sell thebusiness.nbsp; The theory is that if you made a mistake in calculatingyour sales taxes, it is statistically unlikely the state will assessyou for more than 300% of your average monthly tax liability.nbsp;
Of course, if the state conducts a sales tax audit and finds out you#146;vereally fouled up and owe a lot more than that in sales taxes, theescrow amount may not be enough to pay the state everything you owe,and you will have to go out of pocket and "pay up" in order to preventthe state suing your buyer for the shortfall.
Cliff Ennico (
cennico@legalcareer.com
)is a syndicated columnist, author and former host of the PBS televisionseries 'Money Hunt'. This column is no substitute for legal, tax orfinancial advice, which can be furnished only by a qualifiedprofessional licensed in your state. To find out more about CliffEnnico and other Creators Syndicate writers and cartoonists, visit ourWeb page at
www.creators.com
or visit
succeedinginyourbusiness.com
.COPYRIGHT2009 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE,INC. Permission granted for use on DrLaura.com.
