Wednesday, September 7, 2005

This is a page from my book, “How I Sold My Business: A Personal Diary”

I met with the business tax attorney today, and true to Joe's word, he's very sharp, and very quick. I didn't need to repeat anything, and he didn't babble on like our previous business attorney.

In my earlier discussions with Joe he suggested trying to receive all my payments from the partners -- who I assumed would buy my shares eventually -- as regular cash payments, but the tax attorney said no, the best way to get paid in a situation like this was to have as much of the payments to me classified as "goodwill." While any other form of payment would be taxed as ordinary income -- andthe first rule of a tax attorney is that ordinary income is bad -- goodwill payments would only be taxed at 10%.

As an example, let's say I received $300K from the partners. If all of this is taxed as goodwill, my net would be $270K, but if it's taxed as ordinary income, in my tax bracket of 33%, my net would be only $200K -- a whopping $70K difference!

Tax attorney and "goodwill"

He said I was eligible for this "goodwill" treatment for a variety of reasons. First, I was the founder of the business. Second, throughout the history of the company a large majority of the revenue of the business had come through me. Third, I have done a fair amount of public speaking. Putting these things together, it was easy to argue that most people who thought of the company really thought of me. (I don't know the exact definition of "goodwill" here, but that's how he explained it to me.)

There are a couple of technical issues here on how much of the sales price can be classified as goodwill, and how much can't, and I don't understand all of this yet. A second part to this is that I need to get the partners and the company accountant to buy off on this, but he said that this is usually very possible, though I probably wouldn't get 100% of the sales price classified this way, again to accounting reasons I don't fully understand yet.

We also talked about a variety of ways that I might be paid, including (a) getting all the cash up front, (b) getting some cash up front and some deferred, and (c) getting all the cash in a deferred manner, presumably from the cash flow of the business. He strongly advised getting all the cash up front. (In fact, he would demand it if he asked me to represent him in any further way here.) He said he's seen so many long-term buyouts fail in all sorts of different ways, and that I was much better off even taking a little less money just to make sure I got it all up front.

The whole meeting ended in 2.5 hours, and I was extremely happy with the results. I had just spent $700, but it seems like $700 with a potential five-figure payback, and I'd take that any day.

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