Now that you have the information you need from your attorney in order to sell your franchise territory to a neighboring franchisee, here are some of the questions you will need to ask your accountant:
1) How should the purchase price be allocated for tax purposes? When you buy a business of any kind (franchised or otherwise), you are acquiring a lot of different assets — equipment, inventory, accounts receivable, motor vehicles (maybe), intellectual property like patents or copyrights, and goodwill. Under IRS rules, these all depreciate at different rates, and both you and your buyer have to tell the IRS (using IRS Form 8594, available at www.irs.gov) how much of the purchase price was used to purchase each type of asset. This is called "allocating the purchase price for tax purposes," and it is best done by having your accountant speak directly to your buyer's accountant and agree on how best to allocate the purchase price. Make sure you do this before you sell the business, as people tend to forget about it afterward. As long as you and your buyer tell the IRS the same story about how the purchase price will be allocated, life will be beautiful. But if you and your seller tell the IRS different stories, then both of you will be audited. Not a good thing.
2) Are all of my tax returns up to date? Your buyer will want to see copies of your most recent income tax, sales tax and other tax returns, but you will have to file "bringdown" tax returns for the period beginning on Jan. 1 of this year and ending on the date you sell the business. If those returns show that your business has deteriorated when compared with the same period last year, there's a good chance the buyer will want to reduce the purchase price based on your more up-to-date information.
3) Will sales or other taxes be due on the machinery, equipment and other physical assets I will be selling to the buyer? Many states have a bulk-sales law that requires the buyer to pay sales tax on the tangible assets (always the equipment and machinery, maybe the inventory but never the goodwill) you are selling to him. This is another reason why the allocation of purchase price is so important. The more of the purchase price that is allocated to tangible assets like equipment, the more sales tax your buyer will have to pay when you sell the business. Some states also have personal property taxes and floor taxes on specific assets that will have to be paid when you close the sale. Even though it is the buyer's responsibility to pay these taxes, you and your accountant will be asked to do whatever you can to minimize these tax obligations as a condition to getting the deal done.
4) Will the state government require a portion of the purchase price to be escrowed for any unpaid sales taxes? When you sell the assets of a business, the buyer is not subject to any debts, liabilities or obligations he has incurred except for those he assumes in writing. The one exception to that, in many states, is unpaid sales taxes (some states call this a bulk-sales requirement). If you did not file all your sales tax returns when they were due or you owe sales taxes, the state can sue your buyer to collect them even though you sold only the assets of your business, not the business itself. Because the exact amount of your sales tax liability will not be known 100 percent before the closing, it is customary for your attorney to hold a portion of the purchase price in escrow until you have filed all of your sales tax returns through the sale date, paid all your sales taxes and received a clearance certificate from your state tax authority saying they are satisfied and won't go after your buyer.
You can ask your state tax authority to determine the amount to be held in escrow, or, if that is not possible, you can calculate the escrow amount as follows: Take the arithmetic average of the sales taxes you actually paid each month for the last six months; multiply that average by three; and escrow that amount when you sell the business. The theory is that if you made a mistake in calculating your sales taxes, it is statistically unlikely the state will assess you for more than 300 percent of your average monthly tax liability.
Of course, if the state conducts a sales tax audit and finds out you've really fouled up and you owe a lot more than that in sales taxes, the escrow amount may not be enough to pay the state everything you owe, and you will have to go out of pocket and pay up in order to prevent the state from suing your buyer for the shortfall.
Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.