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Selling Your Restaurant? Here are some important tax considerations

July 30, 2019

Thinking about selling your restaurant? There are some tax considerations you should factor in before you decide to move forward. Read on.

Thinking about selling your restaurant? To get the best deal, it’s crucial for your business to know the value of your company and understand the tax considerations involved in the sale.

First things first—what type of sale are you dealing with?

There are two types of sale transactions that will dictate the tax consequences:

Asset sale

With an asset sale, you are selling the different assets that your business owns. This might include tangible assets (land, buildings, furniture, fixtures, equipment, and inventory) and intangible assets (goodwill, licenses, customer lists, patents and copyrights). The different assets of your business are individually valued to come up with the selling price.

You and the buyer negotiate how the purchase proceeds are allocated amongst the assets. Certain allocations can impact the federal tax liability differently.

You, the seller, likely benefit more by allocating more of the purchase price to capital gain assets, since capital gains are generally taxed at 15% - 20% as opposed to the ordinary income which has a highest tax rate of 37%. Typically, capital gain assets include the restaurant’s goodwill (the intangible property like the name brand, recipes, customer base and more) which is recorded when the purchase price is higher than the amounts allocated to all other identifiable assets purchased.

The buyer, on the other hand, will want to allocate more of the purchase price to the tangible assets because they depreciate over a shorter life than the intangible assets, hence accelerating deductions and lowering the buyer’s income.

Stock sale

With a stock sale, on the other hand, you are selling the shares of your business, rather than its assets. Since all of the business’ liabilities are included in the sale, you can get completely clear of the business through a stock sale, which is an advantage for some sellers. Also, a stock sale means capital gain income to the seller, another benefit. A sale cannot be structured this way for entities without stock, i.e. sole proprietorships, partnerships and limited liability companies.

There is no allocation of a purchase price in a stock sale since nothing changes for the entity of the seller. Say a buyer purchased stock for $1 million. The cost of the kitchen equipment, tables, chairs, etc. remains the same, which can be a disadvantage for the buyer because paying $1 million for the stock does not provide immediate depreciation or amortization advantages. With a stock sale, the buyer continues to depreciate the existing fixed assets over their remaining useful life. For these reasons, a lot of restaurants go the asset sale route instead of a stock sale. Most buyers will not agree to a stock sale transaction.

How do state taxes factor in?

Don’t overlook state tax consequences when selling your establishment! While each state has its own rates, many states have no differentiation between an ordinary gain and a capital gain. Some states also impose a sales tax on the transfer of tangible personal property in an asset sale.

Other considerations

  1. Make the restaurant appealing for potential buyers- Bear in mind that potential buyers often visit your restaurant as a regular customer. Make sure all your equipment is up to date and in working condition and the décor of the dining area is attractive and clean, along with the kitchen and bathrooms.
  2. Prepare a financial profile- Do you keep a detailed record of income, expenses and other financial statements? You will attract quality buyers by maintaining a strong financial profile. Retain several year’s profit and loss statements of your company for your buyers to evaluate. It also helps to list your inventory and other assets such as specialized equipment and furniture.
  3. Look into any lease issues- Is your restaurant established in a leased space? Do you own all the kitchen equipment or is it leased? Calculate all the factors concerning lease, such as expiration date and the lease extension option. You’ll need to discuss the status of the lease and clear up any issues that may come up with the change of ownership.

Need guidance moving forward with a restaurant sale? Our Hospitality Services Group can help.

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