Tax implications for buying or selling a practice

Succession Planning

Tax implications for buying or selling a practice

The first in a five-part series about the decision process when buying or selling a business

When making a major decision, you understand it’s critical to look at a situation holistically. For example, you wouldn’t make investment recommendations to your clients based solely on tax considerations. You would, however, assess the tax advantages and consequences prior to advocating a particular strategy to provide a fair and balanced presentation.

Similarly, if you are considering or have already inked a deal to purchase or sell a practice, it’s a good idea to adhere to this counsel for your own situation. The transfer of an advisory practice is a lengthy, multilayered process, and one of those layers is taxes. This information is provided to help explain the types of deals you may participate in with the sale or purchase of a practice, and the related tax issues of which you should be aware.

Stephen Covey, author of the highly successful book “The 7 Habits of Highly Effective People,” lists the ability to “begin with the end in mind” as the second habit. By this he means that to successfully forge a path for yourself, you need to have an idea of where it is you want to go.

At this point it’s probably important to bear in mind that significant tax consequences are frequently the result of highly successful transactions. This is true for the seller, who is responsible for paying taxes on the proceeds resulting from the sale of his or her practice. It is also true for the buyer who, on the heels of a successful transaction and the subsequent growth of his business revenues, will benefit from the taxable deductions and depreciation and potentially depreciation/amortization of purchased assets.

Understanding the Tax Implications Before the Ink is Dry

While you may have thought of the tax implications of transferring a practice, do you fully understand the specific tax consequences of the agreement and – equally as important – do you understand the tax consequences to both the buyer and seller?

Given that the transaction’s success is in part dependent upon the buyer’s ability to service the debt on an after-tax basis, this is one step that should not be overlooked by either party.

There are typically three ways financial advisory practices are bought and sold:

  1. Asset sale – Advisors agree to buy or sell the business assets that make up a business
  2. Stock sale1 – Advisors agree to buy or sell the shareholder’s stock directly, thereby transferring ownership in the seller's legal entity
  3. Revenue-sharing agreement – Advisors enter into a business continuity arrangement (e.g., for death, disability or retirement) whereby the new advisor takes over the servicing of the client accounts and shares the subsequent revenue with the absent advisor (or absent advisor’s beneficiaries) for a period of years

Sample Tax treatments Illustrate the Complexity of a Single Sale

1 The term “stock sale” is broadly used within this document and is for illustrative purposes only and encompasses corporate stock, Limited Liability Company interest, Limited or General Partner interest(s), but is not intended to provide fact-specific guidance that is germane to a specific transaction.

2 There may be additional state-specific tax implications as this chart is not all-inclusive nor does the chart provide for specific circumstances. Please consult your independent counsel for specific tax consequences at both the federal and state level.

This information likely does not address the implications of each specific transaction. Please be aware that this information is intended to provide an overview only and is not a substitute for specific transaction guidance from an attorney, certified public accountant, enrolled agent or other subject matter expert. For specific transactional related advice, please consult with your own tax and/or legal counsel.

CIRCULAR 230 NOTICE: To comply with U.S. Treasury Department and IRS regulations, we are required to advise you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this transmittal is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding penalties under the U.S. Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this document or other related materials.

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