HOW TO AVOID ANXIETY AND INCREASE NET GAIN AFTER TAXES WHEN IT’S TIME TO EXIT A C-CORP.

In the article below -- “C-Corp Asset vs. Stock Sale Dilemma: Is There a Better Alternative?” -- Kurt Reibling summarizes a solid strategy for enabling C-Corp shareholders to enjoy a substantial gain in take home cash compared with a traditional asset sale scenario.

Kurt Reibling, a 17-year veteran of IBM Corporation, was founder and President of CommTec, the Cabling Division of Pomeroy IT Solutions, Inc.. Most recently, Kurt served as Managing Director at Catalyst Advisors, LLC, Kentucky 's premier middle market M&A firm. Currently Kurt is President of Reibling & Associates, LLC.

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Cranes Software International Has Acquired Dunn Solutions Group

FOCUS acted as financial advisor to Dunn Solutions Group, a business and technology consultancy specializing in business intelligence, transactional and knowledge solutions. Cranes Software International Ltd., a global scientific and engineering software solutions provider headquartered in India, will use the acquisition to leverage Dunn Solutions Group’s US domain knowledge in analytics, enterprise project portfolio management, and enterprise applications in verticals such as banking, financial services, insurance, pharmaceutical, health care, education, government, and the non-profit industry. Cranes Software has a presence in 38 countries and has a 350,000 strong global user base. For more information, go to http://www.focusbankers.com/tombstones/deal_dunnsolutions.asp.

C-Corp Asset vs. Stock Sale Dilemma: Is There a Better Alternative?

By Kurt Reibling, Reibling & Associates, LLC.

Shareholders of C-Corps often experience significant anxiety when it is time to exit their business. If they are fortunate, they will exit by way of a stock sale or an ESOP. In these cases, their capital gains taxes will be approximately 20 percent for a stock sale and zero for the ESOP. ESOPs often are not a viable solution.

To minimize future taxes and third party liabilities, the majority of buyers prefer to purchase selected assets of the seller rather than its stock. The total taxes associated with the asset sale of a C-Corp is typically more than 50 percent of the corporate gain (i.e. approximately 40 percent corporate gains tax on the total gain, and then approximately 20 percent capital gains tax on the remaining balance).

In many cases, C-Corp shareholders receive offers for asset rather than stock sales. Due to the huge tax implications discussed above, the sellers often reject an offer at current fair market value because the net after tax proceeds from the transaction is would be too low to meet their personal financial requirements. The C-Corp then asks for a higher price and negotiations stall.

How C-Corp Shareholders Can Increase Their Net Gain After Taxes

There is a solution to this dilemma that enables the shareholders of the C-Corporation to increase their net gain after taxes significantly from an asset sale. Here is a summary of how this strategy works:

• C-Corp shareholders sell the operating assets of the Company to an asset Purchaser at the negotiated fair value.
• C-Corp shareholders leave the cash proceeds from the asset sale inside the Company.
• Then, C-Corp shareholders sell the stock of the Seller to another purchaser (“Stock Purchaser”) in an independent transaction that does not involve the original Purchaser in any way.

In such a transaction, the Stock Purchaser pays the C-Corp shareholders cash upon closing of the stock sale and the Stock Purchaser assumes the ongoing liabilities of the Company, including the corporate tax liability (approximately 40 percent of the corporate gain) from the sale of the assets of the Company. The shareholders, relieved of the corporate gain liability, are now are only responsible for paying the capital gains tax, approximately 20 percent, on the proceeds received from the Stock Purchaser from sale of the stock.

The transaction works because the Stock Purchaser is in a position to shield the gain from the asset sale with solution assets from other operations. Subsequent to the sale, the Stock Purchaser re-engineers the Seller into a new line of business that is expected to be profitable.

As the new owner of the Seller, the Stock Purchaser is responsible for running the Company on an ongoing basis and satisfying the current and future corporate tax liabilities of the Seller. Here is an example of how it works:

Let’s assume the corporate gain resulting from a C-Corp asset sale is $10M. The shareholders typically would net approximately $4.8M after taxes (in most states) after paying taxes on both the asset sale and the stock sale. Utilizing the solution described above, the C-Corp shareholders could net as much as $6.4M after taxes. This represents a gain in take home cash of more than 30 percent as compared with the traditional asset sale scenario.

For more details on this strategy, please call Kurt Reibling at 502-408-6530 or visit www.Reibling-LLC.com.

RECOMMENDED READING:  Patent Nonsense

In the July 12, 2007 issue of The Wall Street Journal, Bruce Sewell, General Counsel for Intel Corp., writes in an article, “Patent Nonsense,” about how US intellectual property laws are long overdue for reform, advocating passage of the bipartisan “Patent Reform Act of 2007,” taken up by the Senate Judiciary Committee this week.

“…Congress needs to pass this bill, during this session…the Patent Reform Act of 2007 responds to the need for comprehensive patent reform that protects the rights of inventors while eliminating the incentives that encourage speculators to game the system…the bill would benefit inventors, consumers and businesses, while maintaining faith in the ‘crown jewel’ of America’s intellectual property system.”