This article provides readers with a checklist used at a business transaction that just closed. The list was adapted from e-mails sent by the author to clients immediately after the closing. The list includes what they can and should do following the closing and is a way to further involve oneself in post-closing activities. The list collects all the different things (personal, investing planning, and business) the client would need to become involved with and think about, including the final sales’ price adjustments.
This is a checklist for clients that just closed on the sale of their business. It was adapted from e-mails I send to clients immediately after the closing. It is a list of what they can and should do and is a way to further involve myself in their post-closing activities. I find that it also collects all the different things (personal, investing planning, and business) the client would need to become involved with and think about, including the final sales’ price adjustments.
Here it is:
Congrats on the sale. It was an arduous process, but it got done. Here is a “To Do” list of some things you should now consider.
Ask for and get completely executed copies of all the contracts and documents you signed. Upon receipt review them to make sure they are correct and that they reflect what you were told and agreed to.
Obtain a final statement of the cash payouts and check to see that you received the correct amount. Also look at the payouts to see if they conform to what you were told and agreed to.
If any of your bank debt was paid at the closing, make sure you have proof that the debts were paid, and releases of any liens and chattel mortgages on the Company’s assets (and yours if applicable) and of your personal guarantees. If you provided collateral in any form, please make sure you received it back free and clear of any liens.
If pending lawsuits were settled with a payment at the closing, also make sure you have satisfactions of judgments or appropriate releases.
Ask your accountant or attorney to prepare a calendar of what still needs to be done. This should include final adjustments such as for the net working capital, release of escrow, due dates of notes still to be paid to you, any stock of the buyer you are being issued and minimum holding period before it could be transferred if applicable, and terms of employment contracts or leases.
If there have been any jobs in process or services performed that have not been billed by you as of the closing date, you should immediately determine all the costs you have in every job that was in progress as well as potential billing for them and have someone from the buyer sign off on those amounts. This would be needed when the net working capital is finally determined.
If you intend to give bonuses to any employees, these should be worked out with the buyer to determine if they could be paid through the company. Otherwise, they would be paid by you personally and directly. If paid directly, you would need to work this out with your accountant to make sure you get the proper offset of the payment from the sales proceeds, that necessary taxes are withhold, the amounts are reported in the right way, and that the recipient also understands the taxable nature of the payment. If you choose to forego taking a deduction and will make a tax free “gift”, you must discuss this with your accountant. There could be income and gift and estate tax consequences to this that you should be made aware of and understand. If anyone that you would be making a payment to is a foreign person, there are added rules and possibly withholding taxes that must be complied with.
If you have any final transaction costs that have not been paid, they should be paid as quickly as possible and then accounted for in the calculation of your taxable gain.
If you received any ownership in the buyer, you should have that interest valued separately to determine the amount to be picked up as part of your sales proceeds. This should be done irrespective of the amount assigned to those shares in the contract.
You should keep the funds you received safe, secure, and liquid for a while. I suggest you have a comprehensive financial plan worked out before you make any investments.
Your accountant should prepare a tax projection so you will know how much to put aside for the taxes and when they need to be paid. In doing the projection, you should be aware of a potential tax benefit from IRC Section 1202 (for C corporation stock acquired during certain statutory periods), Opportunity Zone investments (you could make these investments in multiple mutual funds), as well other tax saving possibilities. You should also consider a substantial one-time deductible payment to a charitable donor advised fund (these contributions could be made with greatly appreciated securities you already own). If you own any securities with losses, I suggest selling them to realize the losses.
Your tax basis should be calculated including any outside basis to determine your gain.
If there were notes received by you as part of the sales proceeds, consideration should be given to treating them as part of an installment sale.
If any of your children have performed multiple services throughout the years and have not been paid, you might want to consider a payment to them which can then be placed in a Roth IRA account, or if they can be paid as independent contractors, they might want to invest the funds in a Roth 401k account.
If your Company’s assets were sold or if the buyer acquired the stock and made a Section 338(h)(10) election, the seller, i.e. you, would be responsible for filing the business tax returns as of the closing date. Arrangements should be made as quickly as possible to gather the information for filing. It is possible that extensions would be needed, or final adjustments might not be available for months afterwards, but whatever could be done early should be done. All available tax deductions and credits should be considered, including research and experimentation credits.
If an LLC or the stock of a C corporation was sold, I suggest that the tax returns of the seller be prepared by seller’s accountant and not the buyer. The seller would be responsible for the tax on the income for that year that was earned while seller was the owner. In the absence of this, you should be given ample time to review the tax return before it is to be filed. You should also be clear who is responsible for the costs of preparing those returns.
The business’ taxes, if any, should be estimated and those funds should be scheduled to be paid when due. The payment of these taxes should be factored into the net proceeds from the sale.
If intangibles were sold, you and the buyer would need to agree on the amounts as well as allocations of the purchase price to other assets including equipment. This allocation might not be done for a while by the buyer, but you would need it to complete your business’ final tax returns.
You and your spouse should review your wills and if necessary, get new ones.
Plan a vacation and let everyone at the buyer’s organization be aware of it.
If you will be continuing to work, you should be paid your salary at the annual rate agreed to with the buyer or if no agreement then either at the rate you were paying yourself at, or at the amount used to arrive at the normalized net income.
If, per chance, you continue to work and are offered stock options or restricted stock, you should consider whether a Section 83(b) election should be made with the IRS and this must be made within 30 days, so it is important you meet with your tax advisor quickly.
You will need your funds invested. This should be coordinated with your existing investments including all IRA, 401k, and retirement accounts. An investment policy statement should be prepared along with an asset allocation appropriate to your goals. It is suggested that you use your accountant or engage a financial planner for this.
I have a suggestion that you segregate what I call “rainy-day” funds from your asset allocation. This is an amount of cash that you are guaranteed to have no matter what and this would cover three to five years expenses with no other income coming in. You would need to determine the amount, period, and interval you are comfortable with. This should then be invested in completely risk-free funds and can be laddered. An example of how this would work for a three-year rainy-day fund is to divide the amount into sixths. One sixth would be kept in your bank account and the remaining five sixths invested to come due at six-month intervals. This would spread over three years. As each sixth comes due, it can be reinvested for three years to maintain the ladder if those funds are not needed.
A caution with investing is that you should consider as your goal a tactic that would provide for modest growth without excessive risk. You just sold your business and likely have more money than you ever had and if you now have enough funds to secure your future financial security, it makes no sense to place it at an excessive risk.
One thing you will need to consider when investing in the stock market is whether to go all in once you make your decision or to do it in stages over a period of time.
It is suggested that you consider an investment manager to advise you and possibly manage your investments. I suggest meeting with at least two such firms and discuss how they could help you, their philosophy for someone in your position, the type of communications they will have with you, and the fees and other sources of compensation they will receive, if any. Even if you have no intention of using such a manger, I still think it is worthwhile to meet with some and find out the advantages of using one. I caution you that if the sale has been made public, you will be inundated with calls from investment managers. I suggest you only speak to people you know or who have been referred to you by people you respect.
It goes without saying, but if you have any credit card debt, it should be paid off as quickly as possible.
I also suggest considering paying off your mortgage. Whatever interest rate you are now paying, it is likely to be greater than the rate you would be receiving on the rainy-day funds, so there is a net benefit for that. If you believe in continuing the mortgage because the potential for investment gains is greater than the mortgage rate, then might I suggest that those funds are being placed at an “excessive” risk. Also, many pretty wealthy people can claim the standard deduction on their individual returns meaning that the full tax benefit of the mortgage interest deduction would not be realized (this should be discussed with your tax adviser). Further, it is a great feeling not having a mortgage.
As far as making impulsive purchases or investments, you cannot be hurt if you wait a little to do this, since it could be possible that you might be harmed if you move forward with something that cannot be easily reversed. Consider “cannot be hurt” versus “might be harmed.” I suggest a six-month getting-used-to-period of your new wealth, situation, and status.
Use the above as a guide and I am sure there is much more that will come up, but this listing is a good start, a good checklist, and an indication of what to expect.
Edward Mendlowitz, CPA, PFS, ABV, CFF, is emeritus partner with WithumSmith+Brown, PC, in East Brunswick, New Jersey. He has over 40 years of public accounting experience, is a licensed Certified Public Accountant in the states of New Jersey and New York, and is one of Accounting Today’s 100 Most Influential People. He is also an adjunct professor in the Fairleigh Dickinson University MBA program. The author of 29 books, Mr. Mendlowitz has written hundreds of articles for business and professional journals and newsletters and presented over 350 CPE programs. He writes a twice a week blog at www.withum.com/partners-network-blog.
Mr. Mendlowitz can be contacted at (732) 743-4582 or by e-mail to firstname.lastname@example.org.