Sale of Aerospace Manufacturing Business with Deferred Taxes on the Sale

Sale of Aerospace Manufacturing Business with Deferred Taxes on the Sale

Overview of Situation

Pacific Business Sales was the Business Broker representing the owner & seller of an aerospace manufacturing business owned by the seller for over 25 years. The company was very profitable, and although the transaction was a Stock Sale, the tax implications for the owner were significant with a $1.5 million transaction value, SBA financing, and no seller note. The seller was looking for tax strategies to defer and/or minimize the taxes on the transaction.

In addition, the buyer was willing to do a Stock Sale to preserve the government, military, and aerospace contracts, but did not want to lose the depreciation on the equipment and goodwill as a result of the stock sale.

Approach & Solution

Our CPA and Tax Strategy partners consulted with the owner/seller and assisted him in establishing an Installment Sale Trust to defer over 90% of the taxes that would have been due at closing. The seller was able in to invest the proceeds from the transaction through with financial advisor managing the assets and the investments would appreciate tax-free, with taxes being paid as money is withdrawn from the trust.

With respect to the loss of depreciation for the buyer, our CPA-Tax Strategy partner recommended using IRS 338(H) for the transaction, which allows a corporation acquiring another corporation to treat the assets as if they were acquired in an asset sale. Thus, the buyer was able to step up the depreciation on the equipment to full market value and amortize the goodwill.

Results & Conclusion

This transaction closed with the seller successfully deferring over 90% of the taxes that would have been due at closing and minimizing the overall tax liability through the stock sale along with other tax strategies implemented by our tax strategy CPA partner. The buyer implemented IRS 338(h) with our tax CPA partner and was able to preserve the contracts through the stock sale and still depreciate the assets and goodwill.

The buyer used an SBA 7a loan to finance the acquisition with their 401K funds for the down payment. Pacific Business Sales facilitated the financing with one of our SBA PLP (Preferred Lending Program) lenders and also introduced the buyer to one of our other partners that facilitates ROBS (Rollover for Business Startups) programs which allow buyers to use their 401k funds as a down payment to purchase a business without taxes or penalties on the use of the 401K funds.