KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE

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comment on what happens to liabilities when you sell your company
February 4, 2019
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comment on what happens to liabilities when you sell your company from January 28, 2019 article
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Ken,
    Read your January 28, 2019 email about what happens to liabilities when a company sells. It reminded me that one reason to have a good accountant, one who is experienced in transactional accounting, in addition to a good attorney, is that many Sellers do not know that the repayment of debt in a sale is typically not deductible against capital gains. 
    For example, if you have $50,000 of RMR and you sell for $3.8 million, and you don’t have any basis (typically cash investment), in the assets that you are selling, you would have a capital gain for the full amount received. If you end up with $3.5 million after the attrition guaranty, the entire amount would be subject to capital gains. The good news is that capital gains are typically taxed at 15% and 20%, not at ordinary income rates, which can be as high as 37%. 
If you have a $500,000 bank loan that is paid off at the closing, the amount of the loan is typically not a deduction. 
    Remember also that employment agreements, covenants not to compete, assets, and many other items are taxes as ordinary income at the higher tax rates. Different states may also tax these amounts. Make sure that you accountant understands the transaction and ask a lot of questions. Have your accountant and your attorney, review the Letter of Intent before you sign it. If your accountant tells you that you also will be liable for the 3.8% Obamacare (Net Investment Income) Tax, he/she is wrong. The time to consider taxes is before you sign the LOI, not after the transaction is complete.
  Mitch Reitman
Reitman Consulting Group
Fort Worth, TX 
817-698-9999
http://www.reitman.us
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Response
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    Even a bad accountant is better than no accountant. if you're going to have to engage and pay an accountant it may as well be the best in the alarm industry.
    Lawyers should not be giving your accounting or tax advice unless the lawyer is a tax attorney, which would mean the lawyer is not an alarm industry attorney. K&K retainers routinely state that we offer no tax or accounting advice, and one of my pet peeves is accountants doing legal work. There's a great reason these are two separate professions.      ‚ÄčThink of the alarm guy who knows how to install a wireless burglar system in a residence giving advice on how to install a commercial fire alarm in a 100 story office building. [which one is the accountant?] 
    Seriously, Mitch is right that you need sound tax advice when selling your business. Your accountant should have a good idea of what tax consequences will arise if you sell, and that's a good conversation to have before you decide you're ready to sell. Next call is to your lawyer. If you've already signed up for our Concierge Service Lawyer Program for the alarm industry we will already be acquainted with what's going on, having engaged in the most preliminary conversations. Call Stacy Spector,Esq for more information on the Program 516 47 6700 x 304.
    Another word to the wise: If selling is even a remote possibility in the next 10 years I suggest you update your contracts and keep them updated. These are your most important assets and the more current your contracts the more equity you are going to have in your alarm business. Simply as that. Call our Contract Administrator Eileen Wagda at 516 747 6700 x 312 to get up to date [I almost said to get "rich"] 
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THE ALARM EXCHANGE

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
516 747 6700
www.KirschenbaumEsq.com