The offer that arrived before the plan

Transforming challenges into opportunities

A return records decisions already made. Planning happens while the decision is still open. This case shows both halves of that at once: what was still changeable, and what a decision five years earlier would have been worth.

Challenge

The owner of a services business received a $9 million offer. The buyer proposed an asset purchase. He had a letter of intent in front of him, a two week exclusivity clock, and no model of what he would keep.

• Price agreed, allocation not. In an asset sale the purchase price is allocated across asset classes, and each class is taxed differently. The allocation was still open and was being treated as paperwork.
• Equipment carrying a recapture problem. Written down to $300,000 against a proposed allocation of $2.2 million. The difference is depreciation recapture, taxed as ordinary income rather than capital gain.
• The whole gain landing in one year. Pushing him into the top bracket and through the net investment income tax threshold in the year of closing.
• Entity form settled long ago. The company had been an S corporation since it was founded, a decision made for reasons that had nothing to do with an exit.

Strategic response

Modeling first, then the authorities, then his decision. We took no position on whether to sell.

• Each allocation class priced. Every class modeled for its own rate, so the after tax proceeds of each version of the deal were visible side by side rather than as one headline number.
• The equipment value independently appraised. Supporting a fair market allocation of $900,000 rather than $2.2 million, with the remainder falling to goodwill. The appraisal is what makes the allocation defensible, and it was obtained before the allocation was agreed, not after it was challenged.
• An installment note negotiated. On $2 million of the goodwill consideration across four years, spreading gain out of a single top bracket year. Recapture cannot be spread this way, which is why the allocation had to be fixed first.
• Authorities documented at the time. With the reporting standard for each position recorded alongside it.
• The five year question answered. Honestly, and in writing, including the part he did not want to hear.

Result

He sold. What changed was the structure underneath the same price.

• $289,000 from the allocation. Moving $1.3 million out of ordinary recapture and into capital gain treatment, supported by the appraisal.
• $96,000 from the installment note. By keeping four years of gain out of one top bracket year.
• $385,000 in total, on an unchanged price. The buyer paid the same $9 million. The difference was entirely in how it was allocated and when it was received.
• The largest number was the one we could not get. Had the company been a C corporation five years earlier and met the requirements, a substantial portion of the gain could have been excluded from tax altogether under the qualified small business stock rules. It was an S corporation, and a five year holding period cannot be created retroactively.

Conclusion

He recovered $385,000 from a deal that was already on the table, which is what planning can do once the terms are known. The larger lesson is in the last line. The most valuable decision available to him expired years before he knew it existed, and no amount of work at closing could reach it. That is the difference between planning and preparation, and it is why the conversation belongs years before the offer.