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© Copyright 2002-2003. All rights reserved.
Page 43
How To Investigate Any Business Opportunity
Income Tax Consequences
Income tax consequences of the buy-sell transaction may be an important bargaining issue if the buyer
and seller are aware of them. The seller should be concerned about the amount of tax he will have to
pay on his gains from the sale. The buyer should be concerned about the tax basis he will acquire as a
result of the transaction. These concerns almost inevitably lead the buyer and seller into conflict in valu-
ing the business.
The income-tax laws are highly technical, and the possible variations in a buy-sell situation are infinite.
Because of this, a discussion specific enough to be really helpful is impossible here. Both buyer and
seller should study the applicable tax laws ; and if an important decision in the buy-sell agreement is to
be based on income-tax consequences, the advice of an income-tax expert should be sought. The key
to tax savings is tax planning before the buy-sell contract is closed.
The seller should keep in mind that he must report any income-tax liability he incurs by selling a going
business. Reinvesting the sales proceeds in another business will not enable him to avoid or postpones
his income tax liability.
A Valuation Example - the Regal Men's Store
This example will help to bring the factors discussed about into better focus. It is not intended to show
what should be done but to give some idea of what might be done.
The buyer and the seller. Joe Critser is interested in buying a men's clothing store. He has had nearly
25 years' experience in the men's clothing trade - first as a salesman in retail stores and more recently
as a sales representative for Sentinel, a major manufacturer of men's clothing. Now 45 years old, Critser
is interested in having a store of his own.
In February, Critser learns that the Regal Men's Store is for sale. James Rombaugh, owner and operator
of the store, is now 67 and wants to retire, he says. He has no heirs, and no employee of the store is fi-
nancially able to purchase the business. Rombaugh started the store in the late sixties and has been the
sole owner since than.
The store. Critser's early investigation convinces him that the store has the kind of possibilities he is
looking for. Although it has been operated conservatively, it has a good reputation in the community and
a creditable standing in the clothing trade. The store has never been particularly aggressive in advertis-
ing, the owner has relied on repeat patronage and word-of-mouth advertising.
Critser suspects that part of Rombaugh's desire to sell is due to competitive pressure from more aggres-
sive stores in the community. Sales have continued to increase about in proportion to the market in gen-
eral, but gross margin and profit have been reduced because of lower overall maintained markup and
increasing costs of operation. Rombaugh owns the inventory, fixtures equipment, and operating supplies
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