By Brandon Fredericks, CPA | AGP Advisory, Leader
A prospective buyer faces many important decisions when contemplating purchasing or expanding a business. First and foremost, the target acquisition must provide adequate return potential within an acceptable level of risk. Once this has been determined, the buyer has likely already spent significant time finding the right acquisition and feels anxious to close the transaction. However, more can be done to maximize the transaction’s potential for the buyer. A thorough analysis of the financing structure can unlock additional value.
When purchasing a business, buyers often decide to use a mix of debt and equity based on a variety of factors. Ultimately, the cash flow the business generates relative to the equity invested determines the return realized on the investment. Consequently, well-placed debt financing can benefit a transaction by reducing the equity required and generating an additional deductible expense to reduce tax payments. However, determining whether a benefit exists, and whether such a benefit would be worth the additional risk inherent with leverage, often proves more than a back of the envelope calculation.
Under the tax reform provisions, determining the true impact of debt financing on a transaction became far more complicated. Previously, all taxpayers could deduct the full amount of interest expenses. Today, a complex IRS formula determines the amount of interest some taxpayers can deduct. Exemption opportunities exist and should be considered, but businesses must meet certain requirements and/or could find themselves missing out on other large tax deductions down the road. Additionally, the nature of debt in a transaction can potentially influence whether losses are deductible against personal income tax, the capital gains taxes owed at a future sale, or even whether capital gains taxes will be imposed on distributions. All these considerations impact the after-tax cash returns buyers realize on their investments.
Has your accountant given you the back of the envelope, instead of a complete analysis of your financing strategy and potential investment returns?
If so, contact the tax professionals at Apple Growth Partners. We will work with your team to understand the details of your transaction. By listening to your goals and objectives, we will help you make the decisions needed to maximize the transaction’s potential. You have worked hard to be considering a new acquisition, you shouldn’t have to settle for the back of the envelope and pay more taxes than required.