M&A Accounting with Nancy Rix

In this episode we are joined by Nancy Rix, CPA, Partner at ATLAS CPA’s and Advisors who specializes in accounting for mergers & acquisitions. Nancy discusses a variety of issues business owners need to know relating to M&A, tax, and accounting.

Nancy joined ATLAS in 2022 and has 40 years of diverse tax, audit, and consulting experience in a variety of industries including manufacturing, distribution, software and biotech.  She has served as the California Society of CPA’s State Accounting Principles and Auditing Standards Chairwoman and is a frequent lecturer and author for numerous technical accounting, auditing, and transaction related topics. She has over 25 years of experience assisting buyers and sellers facilitating transactions. 
 
Prior to ATLAS, Nancy spent most of her early career with Big Four accounting firms in an auditing and consulting capacity, the last five years with Ernst and Young, LLP and PriceWaterhouse Coopers, LLP, respectively, in their Chicago based specialty transaction services groups. There, she led world-wide buy-side and sell-side due diligence and consulting engagements in a variety of industries. She earned her MBA in Finance from the University of Chicago and her Bachelor’s in Accounting from the University of Denver.

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Selling a business is the American dream, the pot of gold at the end of the rainbow, the reward for years of hard work. Successful entrepreneurs make countless sacrifices in hopes that they would someday reap the benefits of their labor and live a new life of vacations, recreation, and prosperity.

You only exit your business once, so you should feel confident passing this milestone. A successful business exit reflects the preparation done beforehand. Failing to plan is planning to fail.

The owner of a privately held company has several alternatives on how to exit their business. In the absence of an exit strategy, events will inexorably dictate the final exit plan. A costly involuntary exit may be caused by death, disability, divorce, disagreement, or distress.

Selling Your Business with David King will help you take control of the sale process and make it positive one.

Transcript

Speaker 1 (00:12):

Welcome back to Selling Your Business with David King. I'm David King, and today I'm joined by Nancy Rix with Atlas CPAs and advisors. Nancy, welcome.

Speaker 2 (00:28):

Hey, thank you David. Glad to be here.

Speaker 1 (00:30):

Great. Atlas is a national small CPA firm and advisory firm serving companies in the middle market and all industries throughout America, and doing international work and domestic work. I'll let, uh, Nancy elaborate a little bit about her. Tell us about yourself, your education, your background, how you got here today to be working for Atlas, doing what you're doing for clients.

Speaker 2 (01:01):

Great. Thanks David. And again, I'm very happy to, to be with you today. I'm a CPA and I've been practicing, uh, for about 40 years now, so, so quite a while. I started my career with, uh, big four firm in the Silicon Valley back in the 1980s, and had a lot of really great experiences working with clients like Apple Computer, uh, Genentech, and a lot of, uh, high profile biotech and, uh, some software engineering firms up in the, up in the Bay Area, and saw a lot of liquidity work being done in, in the 1980s with companies going public and really the advent of the biotechnology industry. After I spent that time with, uh, with Arthur Young, primarily on the audit side, I went to, um, I moved back to Chicago, to the Midwest where I'm from, and I went to business school to University of Chicago. Uh, when I got out of business school, I went back to, uh, at that time then it was EY and went back directly into the transaction practice and spent most of the 1990s working for private equity firms in Chicago and New York, uh, on the buy side, working on, uh, uh, transaction work. So, uh, after that was about the first 20 years of my career or so, David,

Speaker 1 (02:17):

It's actually, it is a small world. I, I was a cpa. That was just before I went to law school. I, I studied accounting and, and I worked in audit for Deloitte for a couple of years. Mm-hmm. <affirmative>, uh, so, and, but I worked in Silicon Valley and, you know, this was the heyday of the.com and there were IPOs every other week. We do four in a month. Right. Um, and, and so I may have worked with semi year old colleagues on, on offerings then I wouldn't have even known it that we, you know, would've crossed paths,

Speaker 2 (02:50):

Have some overlap, right.

Speaker 1 (02:51):

Yeah, yeah. Yeah.

Speaker 2 (02:52):

So it was a, it was a, a fantastic time to be, um, you know, working in that space. Mm-hmm. <affirmative> with that, particularly in the biotech area back in the, in the eighties up in northern California. Um, anyway, after that I really, you know, wanted to do a lot more transaction work, uh, and potentially SEC work and, and went back to, to EY and spent another 10 years or so and ended my career with a big four firms, um, starting the private equity practice in Chicago for pwc. Uh, after that, it was really time for me to step back, uh, and to, you know, not, not, uh, travel so much, was doing, uh, heavy traveling. And right after nine 11, I really wanted to step back from that kind of work and decided to start my own practice in southern California where my family lives.

Speaker 2 (03:40):

Uh, so the, for the last say 19 or 20 years, um, I've been working primarily in the, in the middle, lower middle market area with all sorts of industries and different clients in the Southern California. Um, doing everything from financial audits to tax planning, um, done quite a bit of international tax work with the biotechs here in, uh, Southern California for a lot of reasons. They have a, a number of international issues. Um, and then I spent, I, for the last 20 years, I've spent about half my time helping those clients sell their companies, um, periodically. I do still work on the buy side for, uh, private equity once in a while for a strategic buyer that has private equity backing. Um, I've been doing, I did some, uh, buy side work locally here in the last, uh, two years, but it's been primarily on, on the south side.

Speaker 2 (04:37):

And, uh, I've gotten involved in it in a lot of different transactions at different industries and doing different types of, uh, consulting work on the south side over the last, uh, 20 years. So I ended up with, with Atlas, uh, CPAs and advisors primarily because, um, I was really ready to finish my career in the last, say, 10 years, um, working with a larger firm and really running an m and a practice for, uh, a national firm. And so that's what doing our, or at least, at least doing quite a bit of training mm-hmm. <affirmative>, um, in the Q of a area and, and working with the existing clients, um, and filling a, a need that we have in the firm for some m and a expertise. And that's really what I wanted to do.

Speaker 1 (05:23):

It sounds like you found a perfect niche for yourself and, and the good kinda return to some sort of balance there, that, that you've probably got a fair amount of independence, uh, today, but you've got the resources of a firm behind you that can help you, you know, land, uh, those big fish when there's opportunities to work on projects and they want to see the, the resources behind you, but you also, Right. Exactly. Yeah. Yeah. You're, you're very independent, I'm certain.

Speaker 2 (05:53):

Yeah, e exactly. So, you know, we've got resources all through the firm. We have valuation, uh, we have a, a valuation specialist to help out in that area. Mm-hmm. <affirmative>, we have some other international tax, uh, people, some multi-state, um, tax assistance and an army of financial analysts and, and, um, and CPAs to help out get companies propped first for sale.

Speaker 1 (06:17):

So if you had to describe your sweet spot for the clients you serve and the type of work that you do for them, how, how would you describe the work that you're doing?

Speaker 2 (06:26):

Yeah, so I would describe the, the sweet spot as really being there from the very, very beginning, uh, of the process, um, and helping to educate, um, a business owner who, you know, really by definition, they, they probably have not been through a transaction before, and so they're really starting from, um, you know, a position of not really understanding the nuts and bolts of how a transaction works. They know that they are, you know, ready to maybe retire or continue on with a, with a, um, with a new owner. Um, they want some sort of a liquidity event. And so my sweet spot is really in the middle to lower middle market area. So anything from say a a, uh, a 20 million to maybe a 50 million, um, maybe even up to a hundred million in transaction value type of deal. So the reason why there wouldn't be, you know, I wouldn't, I would hesitate to talk about deals with a higher enterprise value, um, is only because we, um, you know, there may be, there may be larger firms that might be, you know, better for that area. And really, that's my sweet spot because I deal directly with the owners of the company and they're, it's a smaller group of shareholders usually, and I can have a little bit more influence, you know, and spend, There's more time to be spent, um, with the, the business seller explaining the process and working with them and getting them prepped.

Speaker 2 (07:56):

So it's a, it's a personal, it's a personal touch. Yeah. Like of sweet spot.

Speaker 1 (08:01):

And when you say the beginning, beginning of the process, you mean the, the beginning of a transaction you don't usually get retained is anybody's CPA from the beginning of a company and, and work throughout. Do you work with people usually, like on a transaction hired gun to help us with an m and a sort of thing?

Speaker 2 (08:20):

Both. Okay. Yeah, So, so I have, I have clients that, that many of my clients were long term clients that, that, you know, realized that we were there, you know, that we had that expertise to be able to help them sell their company. So when they got, when they started thinking about it, we, uh, I've always done a lot of, uh, counseling in that area with them to try to help them get prepared well in advance. So we always do that as a rule for our regular tax and audit, um, clients. So I'll give you an example. A couple of years ago I had, um, a referral from another CPA to a, um, their software consulting firm. And at that time, this was about three, four years ago, and evaluations for this type of work were very, very high. And the, uh, the, the owners of the business, there were four, four primary shareholders, um, were pretty sharp.

Speaker 2 (09:16):

And they decided that what they wanted to do was to engage us CPA a couple of years in advance to really get themselves ready for sale, um, and to make sure that they had the appropriate, um, sell side, uh, broker, investment banker, the, the right attorneys, and really the right CPA to have them really prepared for what was to come. And that's the best scenario. And I, I, I prefer to be involved at that stage with either an existing client or a new client. But, you know, I do frequently get brought in, uh, at, well, what I would say the last minute <laugh>, um, as, as a hired gun to, um, you know, to help facilitate that

Speaker 1 (10:00):

Protection. That's a good segue there. So if there's a good project where you're brought in either, you know, in advance and you get a little growing time together, or if it's, you know, at, at the right time, once people start making up their mind about a deal, how much time from your engagement through to the closing of deal, and I, and I post closing cleanup, of course mm-hmm. <affirmative>, but how much time do you usually have a couple of years with this point?

Speaker 2 (10:27):

Well, it depends. So, you know, just like anything else, the answer sort of depends on, on the situation. And it can take as long as 18 months in advance, depending on whether the company needs an audit, a financial audit mm-hmm. <affirmative>, um, or review or some sort of a independent, uh, uh, I'll call it an attestation on the financials of the

Speaker 1 (10:48):

Company. So, uh, Atlas does audits and reviews,

Speaker 2 (10:52):

So we do, um, and we have, uh, a system worked out so that the, uh, there are other people in the firm that can do that work and we can satisfy, um, we, we have certain professional standards that we have to adhere to mm-hmm. <affirmative>. So I can't necessarily be consulting and be involved in audit,

Speaker 1 (11:10):

But we have, we can get those firewalls between you and you get the independence. I remember all that

Speaker 2 (11:14):

Stuff. Right, Right. So we've, we've got all of that. Um, and so it, it takes a long time to get on, uh, the audit team's schedule. So if you need, for example, if you need an audit for let's say 2022, um, that's something that you need to be engaging your auditors, um, with now mm-hmm. <affirmative>, and it could in the last few years, even now at, you know, in October, you might be too late to get on the auditor's schedule for, uh mm-hmm. <affirmative>, you know, for prime prime audit season. So yeah. So I can't

Speaker 1 (11:47):

Be, I remember in, I'm sorry to interrupt, but like in Silicon Valley, I would work on companies that would have a potential valuation where they could go public and they, you know, independent accountants meet with them and say they, they simply don't have enough people on their system here to have internal controls and that sort of things that we could get comfortable with this. They've kind of gotta go through the growing pains of having a sufficient accounting system. So it helps early on for people planning to know, well, if you're gonna get audited, you need to have, you know, the boots on the ground.

Speaker 2 (12:19):

So two years ago I was approached with, uh, with a potential, you know, to help out on potential deal with a, a, um, a drug discovery company here in, in San Diego. And they were actually, they had another, um, arm of the business where they were actually doing manufacturing in China, and they had inventory in China, and they wanted to get, um, lined up for an audit. And that type of thing takes a long time because you've got to find the appropriate firm, um, in China, you've got, uh, inventory counts to do. So depending on the type of business, it can take at least, um, you know, a year to get the audits complete if you need audits. So if, if none of that kind of thing is needed, there's still, uh, lead time in making sure that, that the, uh, the tax situation for the company has been, you know, appropriately, uh, cleaned up to the extent that there's been any non-compliance.

Speaker 2 (13:18):

And with the complexity in the tax laws, particularly in the last, you know, five to 10 years, uh, you know, it can take quite a while to get, uh, everything cleaned up. And I'll, I'll give you an example. One of the prime areas that we have problems with, uh, is non-compliance in the way of filing state tax returns mm-hmm. In multiple jurisdictions. And many buyers just, and I'm sure that you can speak to this as well, David, they, they don't like, uh, uncertainty. Mm-hmm. Um, in fact really don't tolerate uncertainty, um, in my experience. And so, you know, really isn't an alternative in many cases to getting those, uh, tax returns that, you know, if there's been non-compliance getting 'em filed, getting or getting into to, and there are voluntary disclosure programs to get into for non-compliance. So it takes a long time. I've had situations take as long as six years to get resolved.

Speaker 1 (14:12):

Those, those are, those are problems that do come home to roost. You, you, you can't sweep that under the carpet. It's not like an unknown. And will this problem ever come around? You will come upon their radar and they will come back for every year you didn't file. So it's immediately face the music and, and file and get current. Yeah.

Speaker 2 (14:31):

Yeah. And those things do take time, particularly if you've had, uh, um, non-compliance in various states. And all of those rules changed over the last couple of years in terms of filing requirements for both sales and use tax and for income tax and various jurisdictions. Um, it's gotten very complicated. And particularly for, for middle or lower middle market companies, Um, you know, there, there just may have been non-compliance during the pandemic or, and, and before. So those things take time. So I would say, just to give you, you know, definitively, um, when you are, when a business owner is thinking about, um, some sort of a liquidity event, 18 months is a good rule of some, um, and a year at probably minimum in, you know, letting you know, not, maybe not contacting an attorney or a broker, but certainly letting your CPA know, um, and making sure that your CPA understands that you may need to bring in a CPA to another CPA with expertise in this area to, to help out and to identify and flush out some of those problems.

Speaker 1 (15:41):

Do you, do you get pulled in on engagements where people really kind of have let their books, you know, uh, but they need to clean up their books

Speaker 2 (15:51):

All the time? <laugh>, in fact, about a hundred percent of the time,

Speaker 1 (15:56):

I, I tell people, do you remember live a, the concert? Maybe three. Yeah. Okay. Well, Crosby, Stills, Nash and Young came out and performed and everywhere. Woo. You know, and one of the announcers even said, if they knew they would be up there today, they would not have let themselves look like this. Yeah. So it's some people's books. It's like, if you knew that you were gonna take it to the market, you, you know, would've started a little bit sooner getting back into shape <laugh>.

Speaker 2 (16:24):

So, yeah. And I, and I'll tell you why, because a lot of, uh, I'll, I'll give you a reason why that I think maybe a lot of business owners don't fully appreciate. Um, and that is, and, and I, and I've got a little bit of a different perspective because I spent so many times or so many years working on the buy side for the buyers. And so I, I try to look at the situation also from the buy side so that I can prepare the seller for what the buyer's going to do. And as I said a minute ago, the buyers don't tolerate, um, a as much uncertainty as maybe someone operating a, a small business would tolerate. Um, they're writing a big check normally, uh, and they're putting themselves on the hook, uh, with some banks and they realize that they're gonna have transition issues.

Speaker 2 (17:14):

And what they really wanna know is they want to de-risk their transaction in any way and to any extent possible. And so, so part of it is just, you know, not being willing to tolerate, um, excess risk. And so they want to know that, uh, the bot, the seller has been, um, interested and engaged in presenting, you know, their best foot, foot forward. And then a big element there is trust. So again, when the buyers are coming in, they're writing a big check, and they, and even more than writing a big check, they have limited time. And so, particularly if you've got a private equity buyer, they have a limited amount of time and, and they don't want to even start diligence or start working with, uh, a, a seller or, um, you know, giving the, the seller, you know, talking about a, a fairly high valuation when they perceive that there are gonna be problems, um, in getting the deal done. And that is a function of their time. They have, there are a lot of sellers out there, and they, uh, you know, really wanna allocate their time to a situation that has a high likelihood of closing

Speaker 1 (18:29):

With, with companies and their own, you know, accounting systems and everything. I, I may have been old school here, but from when I started in 1991, um, even smaller businesses had somebody in house who was a CPA who had the simple title of controller, and they were qualified to do that job, and they would have maybe a couple of accounting staff. And these just weren't the most highly paid people. They were, you know, qualified CPAs with a couple of years of public accounting experience. And it seems that everybody has just gotten away from that and uses outsourced to accounting services. I know that service providers are more, you know, entrepreneurial these days and offered a lot of services, but I, I, I don't understand why more people don't simply have a controller. Is there a shortage of qualified controllers out there? Yeah.

Speaker 2 (19:24):

Yeah. So I, I think that's a lot of different things. So there's definitely a shortage of qualified controllers, number one. Uh, number two, I think a lot of, uh, entrepreneurs I'm seeing more and more have what I call the app mentality. Mm-hmm. <affirmative>, uh, and what I mean by that is everything is outsourced and everything is, um, you know, a push of the button away. Yeah. And, and, and that includes their own internal accounting. And so what they wanna do is they want to just take it completely off their desk and have it be the responsibility of, of someone else. Um, so I think it's partly that mostly the shortage of, of good accountants, um, the inability of a, a, a business owner to evaluate who would be a good controller and discomfort in hiring a relatively high paid person for that job. Mm-hmm. <affirmative>, I think they're just not comfortable doing that. Um, and then also the proliferation of, you know, this, the, the financial analysts, controllers, CFOs that are out there are now, um, you know, working for many different companies at the same time mm-hmm. <affirmative>, and it's just a, a shift in the way we're working. I I, I don't necessarily think it's a positive thing. Mm-hmm. Um, but, but it is definitely where we are.

Speaker 1 (20:41):

I see a lot of, um, kinda confusion in it, and there's, people will have turnover over who they use as their outsource providers, Right. There's a data security issues. I'm like, I, I really thought the old system worked fine, but I also understand that right now there is a shortage of people graduating with accounting degrees and becoming new CPAs. More people wanna be a computer programmer or just do something mm-hmm. <affirmative> different than accounting, that it's not, it's not getting the draw that it used to. Is that, is that consistent with the profession?

Speaker 2 (21:15):

That is absolutely consistent. The young people coming, you know, we don't have this many people studying accounting in school, uh, or finance. And when they, you know, the, the ones that we do have coming outta school are getting snapped up by the big four firms who just have literally armies of, uh, young CPAs that are taken out of the mix. Um, because they're working for very, very large companies, primarily due to regulations around, you know, and, and the mm-hmm. <affirmative>, um, the time consuming nature of auditing public companies, um, is just a very labor intensive process. So a lot of the labor is just completely taken off the market and it's gone to the biggest firms.

Speaker 1 (21:58):

Yeah. Maybe some of the people that, there's an overabundance of attorneys out there, maybe instead of going to law school, you can get, people can major in accounting and the, the work, especially the transactional work is it, it's related and you're gonna be seeing a lot of the same type of stuff. Um, and, and a lot of lawyers dealing with transactions, we get a work with numbers all day long, even though we don't bless anything. Um, maybe some lawyers with before they make that decision, you might wanna look into accounting <laugh> if you want any of these type of people <laugh>. So anyway, No. For career advice, what Right. When you're working on a transaction, um, is you the, the focus more on the tax accounting issues or the financial accounting issues, or both?

Speaker 2 (22:49):

Right. That's a really great question. I'm really glad you asked that because, you know, in my experience, and, and I think, um, your CPA listeners will, will get a chuckle, um, from this, when I say that when our clients decide that they're going to talk to a potential buyer, or maybe they're thinking about some sort of a liquidity event, we find out oftentimes, well after they've already hired their advisors and maybe have a, a, uh, you know, potential buyer or two out there, and they call us to find out what their tax liability is gonna be on the transaction mm-hmm. <affirmative>. And so there is a great, um, misperception that that's what we do, is we get the taxes paid on a transaction. And the reality is that it's much better for us to get involved, um, ahead of time because that, frankly, the, the tax part of the transaction, there are some things that need to be avoided so that the transaction is more tax efficient than it would be otherwise. But there are, um, bigger issues, uh, that can be handled by, um, a good CPA on the team with experience in this area that are more important than the tax issues.

Speaker 1 (24:06):

I, I think you're, you and I probably go through the same thing all the time of having to bite our tongue and not say, Mm, I could have helped you a while ago. Um, but usually with certain things, whether they're legal or or tax accounting, um, the ship, eventually sales and, uh, something you could have done has gone, um, I don't know if it's rubbing salt in a wound to tell somebody about what they could have done to mitigate their taxes, but oftentimes we get to the end and it's like, Yeah, these opportunities have, have gone

Speaker 2 (24:41):

Well. That's one factor. And I think the other factor is business owners are used to using their CPA for, uh, compliance work, Right. Um, for getting tax returns done. And so that their idea is that that's what their CPA is, is going to do. Because most business owners have never been through this before. They don't really quite understand that there is a whole other body of, um, of, of issues involved in the deal that, uh, involve working capital adjustments and the larger umbrella under purchase price adjustments that the CPA can, should definitely, should be much more involved with, um, earlier on in the process because those things are not necessarily, um, you know, a large part of the deal volume, but they will take a large part of the attention away from the parties to the deal when you are trying to get it closed.

Speaker 2 (25:36):

Mm-hmm. <affirmative>. And what I mean specifically by that is, um, I have seen time after time, after time after time, sellers getting wrapped up, um, upset, confused, um, delayed, um, and not understanding, uh, how the purchase price adjustments work. Right. And that is because they haven't really gotten, um, you know, had a good lesson or explanation of the process mm-hmm. <affirmative>, um, and it, it, that can be done well ahead of the fact so that everyone knows what's gonna happen. Um, and I think personally, I think those are the more important areas because I like to get as sellers back on track thinking about the important things.

Speaker 1 (26:17):

And it, most people, they, it's true that there's, at least it's just anecdotal wisdom that, that people trust. Their most trusted advisor is their cpa. Right. And most of the referrals that I get come from CPAs mm-hmm. <affirmative>. So it, CPAs are the first to know, uh, and if as long as your CPA is gonna be the first person to know about your plans to sell, it doesn't hurt to tell them sooner rather than later. And your CPA can't read your mind and they're extremely busy with everything they're doing. If you're thinking of selling, there's nothing wrong with picking up the phone, calling your CPA and telling them, I'm looking to go out in a few years, give them some time to think about it and then have a meeting in their office. Right. Uh, so many people don't take advantage of the cpa. Oh, I thought you'd come to me, come to me with the plans you never told me about. So. Right,

Speaker 2 (27:13):

Right. And, you know, and, and again, your CPA listeners will understand that, you know, for most of our clients, we, uh, you know, we, we know what you care about. We know who your children are, we know where they're going to college or not going to college. We know who they're married to, we know who your grandkids are. We know, you know what you plan on doing in retirement. We have all of this history with you and we know you so well and your family so well. We can give you the kind of advice, uh, you know, something other than just tax advice. And, and I do.

Speaker 1 (27:46):

Yeah. And I get that from my CPA because I go in every year, sit down with him and tell him everything that's going on. Cuz he does. Let me just for the, the benefit of saying, for the benefit of all the listeners out there that are business owners, let's say you meet with someone and they're three years out, and I know every set of books is different and every transaction's different. So the the advice is gonna have to change mm-hmm. <affirmative>, um, if they are three years out and just to take a generic company, say an S corporation located here in California, um, what would you start advising them to do to think about mitigating their tax hit up the road, let's say they're manufacturing company?

Speaker 2 (28:33):

Yeah. So there's, there's not a lot that can be done to, to mitigate, uh, except understanding how the process is gonna work. And so let me dive into that a little bit. So the tax consequences on a, on a transaction are really going to depend on a couple of different things. They're gonna depend on whether the, the basic structure of the transaction, whether this is considered a stock transaction mm-hmm. <affirmative> or an asset transaction. And I, I won't get into the nitty gritty, um, because I don't, I don't think time is gonna permit that. Um, but that will be the first step is understanding, you know, what you've got, you

Speaker 1 (29:14):

Buy, we get about nine more minutes. Give the kind of the nutshell tax versus asset cause that's the grand prize.

Speaker 2 (29:22):

Yeah, sure is. And so the, a stock transaction is where your buyer is actually buying an equity interest in your, um, your enterprise. So if you are, um, an an llc, then the buyer would be buying a membership interest in your, your llc. If you are a corporation, they would be buying this stock. Uh, and so how, how that works from a tax perspective, the basic, um, TR tax framework is that you've got capital gain on the sale of your, uh, of your business. And that's directly a trend. That's a transaction with the b between the buyer and the shareholders. Mm-hmm.

Speaker 1 (30:01):

<affirmative>

Speaker 2 (30:02):

The asset transaction is something different. And it is a transaction where the buyer is buying the assets of the business, including all of the goodwill, meaning the, the what's not a tangible asset on the balance sheet, the thing that gives the company value, we call goodwill. And so the, and in an asset transaction, the buyer would be buying all of the goodwill, plus most of the assets and some of the liabilities of the, of the corporation. And what happens is that the taxes paid on that at the corporate level on an ordinary income basis. And then what happens is the corporation then, uh, either pays tax if it's a, if it's a C corporation mm-hmm. <affirmative> or just pays a nominal, um, state tax and various jurisdictions on, uh, state taxes. And then all of the cash and whatever assets and liabilities are left over in the corporation are distributed to the, uh, the previous shareholders of the company.

Speaker 2 (31:07):

The entire process really from a tax and accounting, um, maybe not so much on the accounting side, but on the tax side, is driven by whether this is a stock versus an asset transaction. The important thing to realize is that from the buyer's perspective, they usually are looking for, um, the best of both worlds. So they want, um, the benefits legally in a, from a stock purchase, uh, because they, it's very difficult to transfer in in an asset sale. Right. The seller needs to transfer contracts to license to the, the buyer and licenses, things like that. And that's extremely time consuming. Yeah. On the plus side with the stock sale, the buyer doesn't necessarily want all of the seller's liabilities including tax liabilities. Mm-hmm. <affirmative>, so there's a trade off there. And David, what I've seen over the last 25 years is that the attorneys like you have gotten so much better at protecting buyers from stock, uh, from liabilities, uh, related to a stock purchase that buyers have gotten much more comfortable with a stock purchase than they were say 25 years ago. Right.

Speaker 1 (32:17):

They can be negotiated to the same allocation risk. There's, there's just no reason to for that to drive. I, I get it that the taxes will often be determinant and that's, but there's no reason why the liability allocation as long as it's a, um, a, a seller who there's gonna be some recourse against if they're, you know, gonna go to Guatemala and hide the money under the metro <laugh>. Right. Then there's not a whole lot you can do either way, but, um, you can, you can allocate the risks to be the same place.

Speaker 2 (32:49):

So, Yeah. And so what I've seen over the last, again, the last 25 years is new innovations like rep warranty insurance mm-hmm. <affirmative>, uh, and things like, you know, the, the, uh, attorneys have just gotten a lot better at, um, you know, knowing how to protect both the buyer and the seller with mm-hmm. <affirmative> protective language in, in the, in the contracts. So the buyers are, are good generally and desire a stock purchase. Uh, and that's good for the seller. So, you know, why don't we see all stock purchases? Well, we don't see all stock purchases. Um, for, you know, one, there's one primary reason which I'll, I'll, I'll get into. And that is because an asset purchase will allow the buyer to, um, make some elections on a, on a tax basis that would allow them to write off the majority of the cost of the purchase, the entire purchase price over a maximum of say, 15 years.

Speaker 2 (33:48):

And that is an enormous benefit to the buyers, an enormous benefit. And so if your buyer is planning on holding the, holding the, uh, the business for a number of years and not just flipping it mm-hmm. <affirmative>, uh, they're often interested in being able to make that election to write off the purchase price to make it super tax efficient from, from their standpoint. So from the very beginning, there should be a discussion with the seller, um, to educate them on the differences between the stock and the asset purchase and whether it, you know, and what it means to them from a tax standpoint.

Speaker 1 (34:25):

If there's one thing that I would wanna impress upon business owners today is that the biggest cost of the selling your business, the biggest expense you're going to incur by far, by leaps and bounds multiples of anything else is your tax liability. Mm-hmm. <affirmative>. So it is important to start working with your accountant and wrap your head around these issues. If there's one thing you wanna leave with our listeners today, but the one thing that they should most keep top of mind is they plan for a sale transaction. Mm-hmm. <affirmative>, take your time. Feel free. What would you want them to

Speaker 2 (35:02):

Remember? Right. Right. That's such a great question. Thanks for, for throwing it out there because I'd really like forest sellers to, to know that it's extremely important to pick the right investment banker or um, slash broker representative to, um, market your company and to be very careful about, um, the buyer that you choose and to do, uh, you know, it's not always a comfortable prospect to do any due diligence on your buyer, but I have seen so many transactions, um, just either blow up, take way too, uh, long, um, show just erosion of value as the months go by because you may be prepared and you may have great advisors on your side, but if you have, um, or your investment banker has, uh, gotten you involved with what I call a a bad buyer, you are going to have, you're gonna be at a world of problems.

Speaker 2 (36:05):

The thing that I would, and, and one of the reasons is because you do not wanna get involved in a transaction and have it not close mm-hmm. <affirmative>, uh, and when a transaction dies, I, I can't tell you how many times on the buy side I've been on transactions that were previously, um, that, that a transaction maybe a year or two prior, uh, died for some reason. And the buyers, once they know that they will not stop until they know the reason why it died. Okay. And they will be all over that. Um, and, and it will, it, you know, so, and it diminishes the value, uh, of the, of the sale. Yes. And it helps the, you know, and it, and it creates a situation where you potentially have, um, trust issues with your buyer and that is a very, um, you know, and that's not an optimal situation. So, you know, my advice will be to start early. Yes. Pick good advisors, Uhhuh, don't try to go cheap.

Speaker 1 (37:02):

Yes. Perfect. That is all sage advice. And, and I can say for certain that, that the choice of the right CPA is also paramount. Right. And Nancy provides excellent services to her clients. I've worked with her. She is an ace at what she does, and she's been a wonderful guest on our podcast here. Thank you so much. I definitely want to have you back again, think of additional topics, you wanna educate cause this is golden stuff. Yeah. Well, to everyone out there, thank you for joining us. We'll see, see you next time on Selling Your Business with David King. Bye.