The are a number of "must dos" for business owners as they start planning for an exit. Something Kreischer Miller Director of Tax Strategies Brian Kitchen recommends to owners who are looking to exit, particularly those who don't have an audited financial statement, is to obtain a quality of earnings report.
"A quality of earnings really helps a business provide readily accurate financial information that, not necessarily ensures that it's accurate, but finds any variances and something that may not necessarily be picked up in a compilation or review. That really gives authenticity and confidence in the financial statement reporting packages that are going to be required as part of a due diligence process."
Kitchen also recommends reverse due diligence. That, he says, provides an opportunity for business owners and their management team to identify "skeletons in the closet."
"What I mean by that, there could be issues with income tax sales and use tax, unclaimed property. There are a lot of issues that will certainly come up in actual due diligence when you're actually going through that process. So, our recommendation is for business owners that are looking for an exit in the near future to really identify and attack those issues now."
It's also wise to do financial modeling for after-tax net tax proceeds.
"Traditionally, you would run some various scenarios of what a perceived market value would be, apply different iterations for how the deal could be structured and really try to generate what that after-tax value would be."
Then it becomes a matter of thinking about how to get that number to grow. To get that number to grow, there could be some concepts and ideas that business owners can apply at the forefront. That, he says, could include restructuring or evaluating where the domicile is of the company. Businesses that reside in a high-tax jurisdiction can explore restructuring and planning opportunities via the ownership that can generate that higher after-tax net proceeds value.
And lastly, he says owners should consider estate and gift tax planning to try to capture more of a lower value today knowing that they're modeling out a higher value later.
"(It) really provides the opportunity to do some pretty extensive and sophisticated estate and gift tax planning well in advance of a presumed sale."
Kitchen spoke at last year's Philadelphia Smart Business Dealmakers Conference about maximizing your deal success with pre-transaction tax structuring. Hit play to catch that discussion.