Representing the Buyer vs the Seller: Tax Planning for Business Deals

Tax planners need to employ different strategies depending on whether they’re representing the buyer or the seller in the sale of a company. Buyers and sellers have competing interests when it comes to tax advantages—what is good for the buyer is often bad for the seller and vice versa.

For example, a buyer will likely want an asset sale, so they can take advantage of benefits like bonus depreciation, which could allow them to deduct 100% of the sales price in the year of the purchase. The seller, on the other hand, will generally prefer a stock sale. This enables the seller to receive capital gains treatment and therefore a lower tax rate than if the profits were treated as ordinary income.

Similarly, the buyer and seller will likely be at odds in terms of how to structure payments. The buyer will want to stretch out their payments for as long as possible to make sure the business is viable and to take on as little risk as possible. Conversely, the seller wants to get paid right away, so they can pass that risk on to the buyer and avoid ongoing responsibility for the business. See the comparison chart below for key differences:

 BuyerSeller
PriceLowest possible priceHighest possible price
StructureAsset sale (depreciation)Stock sale (capital gain)
Timing of PaymentsMake payments over a long span of timeAs much cash as possible upfront

As a tax planner, you want to think through these priorities in advance to help your client negotiate the terms of the deal accordingly. For example, if you represent the seller and you know that the buyer wants as low a price as possible, you may be able to leverage that to your advantage. Let’s say you have a stock sale that will qualify for a 1202 exemption, which allows capital gains from qualified small business stock to be excluded from federal tax, up to $10 million. Since the seller will not need to account for that tax burden, they may be able to offer a lower price to the buyer in order to move the deal forward.

In general, when you are advising in a negotiation, remember that when one deal point is given up by your side, you can ask for a deal point to be given up by the other side in exchange. If structuring the deal as a stock sale is really important to the seller, they might negotiate this by offering to lower the price. If lowering the price is not an option, the seller could appeal to other buyer preferences like spreading the payments out over time. Just having an awareness of the typical dynamic between buyers and sellers can be a huge advantage in planning ahead to achieve the best possible outcome for your client and even for the other party.

As a tax advisor, you don’t need refined negotiation skills to add value during a business sale—you are there as a consultant to help your clients think through the financial ramifications of their decisions. Learn more about specific ways to support business owners by becoming a Certified Tax Planner.

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