Don’t forget the Taxes

Taxes come in numerous forms. Sales tax, use tax, business operations tax, income tax etc. These taxes can vary widely from state to state, but I promise you that whatever state you are buying or selling a business the government will want a piece of the action. Taxes can have a material impact on the value of a business and also on the money needed to close. So, my suggestion is the do your tax diligence up front and do your best to capture these items in your underwriting. Here are two examples from my part of the country.

Sales Tax - Washington: let’s say you are buying a HVAC company in Seattle. This company has a large fleet of vehicles (50) and a large balance sheet of equipment. Then if the deal is structured as an asset sale you would owe WA approximately 9% on the equipment’s value and another 9% on the FMV of the vehicles. On top of this, you will pay ~$50-$100 per vehicle to transfer title / registration. Before you say, we’ll I’ll just say the FMV of the vehicles is really low. Good luck! The State of Washington checks the values on KBB. On a larger transaction, this tax bill could be $100-300k dollars due at close.

Portland - Metro Supportive Housing Services: In 2020, Portland passed this tax, which is a 1% income tax (collected by employers starting in###-###-#### on earners above $125k. If you were buying a professional services firm in Portland with highly paid employees, I would anticipate all of these employees asking for a 1% raise in 2023 when they see their W-2, which would simply keep their take home pay about the same as the previous year. Yes, I know my math is slightly off here. It’s why I said, “about”. :)

These are just a few examples of the implications of unforeseen taxes. So, don’t forget to do your tax due diligence and look into these before submitting an LOI. It might be an opportunity to negotiate a better price or to shift taxes into the Seller. (BTW - someone should post a comment about all the real estate taxes to look out for as well)

For the record, I’m not an accountant and this is not tax advice. I’m just highlighting something I’ve learned along the way.

searches - What other taxes should buyers be on the look out for?

Advisors - Can you help avoid this tax pitfalls and help structure the new entity for tax efficiency? If so, drop your name in the comments.