What is the importance of intangible assets when selling a business? All businesses have two classes of assets. They are either tangible or intangible. A tangible asset is property or something you can touch, for example a piece of land or a building. Other examples include a photocopier or desk and chair and these are collectively called Fixtures, Furniture and Equipment. Intangible assets cover a range of items and include goodwill, covenants not to compete, trademarks and trade names, licenses and permits and more. So a good question at this point is “Why do I want to know this and why do I care?”
The answer to the above question whether you are a buyer or seller is that when you are buying or selling a business, there are tax implications you need to know about. And this especially applies if you are the seller as it will affect the amount of money you put in your pocket once the business sells and eventually catches up with the buyer when they sell, plus during their ownership of the business with the depreciation they are able to take as a tax deduction.
The main point of this article is to simply make buyers and sellers aware that there are tax consequences that flow from buying or selling a business. If you own a business and are considering selling, talk to your tax professional so you understand what taxes you’ll need to allow for when the business closes escrow and when they are due and payable. If you are the buyer of the business, there are different tax implications for the different allocations we mentioned above. For example, a Covenant Not To Compete paid to the seller is generally taxed at ordinary income. For the buyer, they are able to write off this part of the purchase price for tax purposes generally over a 15 year period.
Too much information? You bet. Is it complicated? You bet. Is it important? If you own a business and want to know approximately how much you’ll get to put in your pocket if you sell the business and not waste a lot of time, unnecessary stress and money and then walk away from a wonderful offer from a buyer because you don’t get to keep as much of the purchase price as you thought you would; I think you’d want to know.
Also, in a lot of cases you may need to spend time to make sure some of the assets of the business are all in order both from a tax perspective and also a legal perspective. If you own some patents, trademarks, trade secrets, copyrights, architectural designs, recipes, engineering designs etc but the right legal protection is not in place and you disclose these things to a buyer who understands they are not legally protected, you may have literally given it all away.
The above intangible assets often require special legal protection. This legal protection is best locked in place by talking with a qualified attorney who specializes in intellectual property. For example, a patent is a property right granted by the United States Patent and Trademark Office and should be recorded on the books of your company. Making sure these assets are legally protected is simply good business but it does take time, understanding what needs to be done and buying the right help to ensure it’s all in order.