This is a page from my book, “How I Sold My Business: A Personal Diary”
David and George have become the voice of the new partner coalition, and they asked me today when I'll be ready to meet again. I told them I was working on some spreadsheets, but ran into a delay yesterday, and I also wanted to talk to my attorney about some of the particulars. I told them I would get back with them on Wednesday, but I wasn't sure if I could meet with my lawyer by then. I didn't mention that I was going to be talking specifically to my tax attorney because I don't want them to start thinking about anything here unless it's necessary.
Discussion with my business tax attorney
I put in a call to my business tax attorney (Dan), and by the end of the day we had a chance to talk. I explained my spreadsheet to him, how I was looking at a cash flow analysis, etc., and he said I really needed to look at it as an outside corporation buying my shares.
If an outside corporation bought my shares, that corporation would receive the net income from business as an income to their business. That business could then take all sorts of deductions against that income, so they wouldn't be paying taxes on that net income directly. With their deductions, they could reduce that income with legitimate business expenses, and then pay taxes on whatever profit remained.
He explained that there are actually many variations on this, but that I shouldn't worry about the tax consequences here. He said that if a 24-month ROI was what I was looking at, I should ignore the tax consequences, and just work it out so the new cash flows to the partners would get them their $500K back in 24 months. Because he's my attorney he said he couldn't work with them on this, but that they should consult their own tax attorney to learn how to best handle this.
I thanked Dan again for his time, and I also appreciated that he understood what I was talking about almost immediately. I thought this might take a while to explain, but he seemed to know exactly what I was talking about.
That being said, if I were in the partner's shoes, I wouldn't go for this deal. I'd want the cash from my bank account replaced with the same amount of cash in my bank account in 24 months. I'll present my spreadsheet without this tax information, but I'm sure they'll figure this out, and there will be some sort of negotiation.