Planning Well in Advance of a Transaction

From a tax and estate planning perspective, the most valuable opportunities often arise well before a business is formally brought to market. Early planning allows business owners to take advantage of strategies that may no longer be available once a transaction becomes imminent.

One key consideration is ownership structuring. Reviewing how the business is held, whether individually, through entities, or in trust, can uncover opportunities to improve tax efficiency and facilitate wealth transfer. For example, transferring minority interests in a business to irrevocable trusts for family members, when valuations are lower and before a sale is anticipated, may reduce future estate tax exposure. These strategies, often referred to as “pre-sale gifting,” can allow appreciation to occur outside of the owner’s taxable estate.

Trust planning also plays an important role. Properly structured trusts can provide asset protection, centralized management, and multigenerational wealth planning benefits. However, timing is critical. Once a letter of intent is signed or a sale becomes highly probable, the IRS may scrutinize transfers more closely, potentially limiting the effectiveness of these strategies.

From the deal side, “early” really means early. By the time a letter of intent is signed, the framework of the transaction is often set, and leverage begins to shift. Preparing in advance—cleaning up corporate records, evaluating contracts, and aligning ownership—can prevent delays and preserve negotiating strength.

Just as importantly, early coordination with tax counsel ensures that the business is positioned in a way that supports both marketability and tax efficiency. Buyers will conduct extensive diligence, and a well-prepared seller is better equipped to maintain momentum, avoid surprises, and command stronger terms.

Planning During the Transaction

Once a transaction is underway, the process moves quickly and becomes highly structured. Negotiations typically focus on key terms such as purchase price, representations and warranties, indemnification, and, critically, deal structure.

One of the most significant structural decisions is whether the sale will be an asset purchase or a stock purchase. Buyers often prefer asset deals for liability protection and tax benefits, while sellers frequently favor stock deals for cleaner exits and capital gains treatment. Navigating this tension is a central part of the negotiation process.

In addition, deal mechanics such as earnouts, rollover equity, and escrow arrangements can materially impact both risk allocation and overall value. These terms should be evaluated not only from a legal perspective, but also in light of their tax consequences.

That’s where tax planning continues to play a critical role during the deal itself. The structure of the transaction directly affects how proceeds are taxed, and careful analysis can help align the interests of both buyer and seller.

For example, in an asset sale, buyers may receive a step-up in tax basis, which can be highly valuable. However, sellers (particularly C corporations) may face double taxation. In a stock sale, sellers often achieve more favorable capital gains treatment, though buyers may be wary of inheriting liabilities.

Tax elections can sometimes bridge this gap. Certain elections allow the parties to achieve a hybrid result; providing buyers with basis step-up benefits while preserving favorable tax treatment for sellers. These opportunities require proactive analysis and close coordination with deal counsel.

A Coordinated Approach Delivers Better Outcomes

A successful transaction is not just about getting to closing—it’s about getting there efficiently, with minimal disruption and maximum value; and making sure you actually keep that value when it’s all said and done.

Together, a coordinated team of advisors can align transaction execution with tax efficiency and long-term wealth planning. Business owners who engage counsel early (and maintain that collaboration throughout the process) are best positioned to achieve a successful and well-planned exit.

For those considering a future sale, the takeaway is clear: start planning early, stay engaged throughout the process, and ensure your advisors are working together every step of the way.

For more information or to seek counsel from our Business & Corporate or Taxation practice groups, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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A DST is a structure that sellers can implement to take the “bite” out of a tax bill. Generally, when owners sell their business, a large, one-time tax bill accompanies the sale. An owner is subject to tax because the business sold an asset with a low tax basis, but the asset’s fair market value was much higher. The difference between the fair market value and the tax basis is where tax is applied. For owners who have labored to grow their business, getting stuck with a hefty tax bill may cause them to feel like they are getting the short end of a deal.

Typically, when owners sell their business, the value of the business is greater than its tax basis. A classic example is the stock of a family-owned corporation. If a business owner sells the stock (and this stock likely has a very low tax basis), that same owner will owe capital gains tax on the difference between the purchase price and the tax basis. Despite the owner being taxed at capital gain rates on the asset appreciation, the tax bill could still be a tough pill to swallow. Instead, the selling owner may have saved money if the transaction had been structured differently.

By engaging a DST, an owner sells the business to the irrevocable trust in exchange for a promissory note. Now, the irrevocable trust owns the business, and the owner holds a promissory note payable by the irrevocable trust. Then, the irrevocable trust will sell the business to an end-buyer for cash. With the end-buyer holding the business, the irrevocable trust now has the cash, and the irrevocable trust can pay down the promissory note to the now-former owner. While the irrevocable trust makes payments on the promissory note, the proceeds from the sale are invested, and those investments can generate income to help pay down taxes on the original sale.

A DST structure is a complex arrangement. Before an owner implements a DST, an owner should engage a sophisticated advisor familiar with the tax code, mergers and acquisitions, and estate planning. Without proper implementation, a DST could come under the scrutiny of the IRS. This means that the IRS could challenge the tax deferral of the sale of the business and instead find that the taxes cannot be stretched over a period of years. A skilled advisor, well-versed in structuring these transactions, can help advise owners if preparing for sale with a DST is appropriate for their business.

While a DST is not a panacea for every owner, under the right facts, this structure may provide value to legacy business owners on exit. Because a DST defers taxes while creating an opportunity to invest proceeds, a DST may be the right tool for you to preserve the value on sale.

For more information or to seek counsel from our Mergers & Acquisitions group, please reach out to request a consultation or call us at 216-696-1422.

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*This article was originally authored for publication in Crain’s Cleveland Business. To view this article on the Crain’s website, follow this link.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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What are stablecoins?

Stablecoins are a form of cryptocurrency issued by private companies. As their name suggests, they are significantly more stable than other cryptocurrencies because their value is tied to assets such as the U.S. dollar, gold, and government securities. Stablecoins are primarily used for trading, conducting transactions for goods and services, insulating against local currency instability, and facilitating cross-border payments.

What does the GENIUS Act do?

The GENIUS Act allows only permitted issuers to create payment stablecoins for use by individuals in the U.S., with specific exceptions and safe harbor provisions. Currently, permitted issuers include insured depository institutions like national or state banks and their subsidiaries. However, the law will soon expand to also include federal and state-qualified payment stablecoin issuers.

The GENIUS Act requires permitted issuers to maintain reserves backing stablecoins on a one-to-one basis using U.S. currency or similarly liquid assets. Additionally, issuers must publicly disclose their redemption policies and publish monthly reports detailing their reserves.

The bill outlines requirements for (1) reusing reserves, (2) providing safekeeping services for stablecoins, and (3) establishing supervisory, examination, and enforcement authority over federal-qualified issuers. Domestic permitted issuers will be subject to these requirements, while foreign issuers must adhere to comparable regulations in their country to offer, sell, or make stablecoins available in the United States.

How will stablecoins and the GENIUS Act affect commercial transactions?

Stablecoins provide several advantages that traditional payment options do not. The GENIUS Act further clarifies these benefits, which include:

• Speed and availability: stablecoins enable payments to be made 24/7, with settlements occurring in minutes rather than days
• Lower costs: payment stablecoins eliminate intermediaries and the accompanying fees typically associated with processing payments. Cross-border transactions benefit from direct payments in stablecoins, avoiding currency conversions and banking delays
• Increase in transparency and control: stablecoins provide real-time tracking of payments and automatically verify compliance with anti-money laundering regulations

The GENIUS Act is set to take effect at the beginning of January 2027 or 120 days after the implementing regulations are issued. In the meantime, businesses should consider taking proactive steps to explore the advantages that stablecoins can provide for them and their contracting partners in future commercial transactions, particularly regarding time and cost savings.

For more information or to seek counsel from our Banking & Finance practice group, please reach out to request a consultation or call us at 216-696-1422.

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Going to Market: Pros & Cons

The classic example of family business planning is going to market, or preparing for a sale or transition to new ownership. On one hand, sales of closely-held businesses are influenced by latent issues of valuation, financing, and other potential pitfalls. On the other hand, a sale provides a direct injection of liquidity, unlocking wealth and helping owners transition into another phase of life. A sale may be best for those who want to get out of a business and pursue new endeavors.

The business could also continue operating in the family — even without the daily operations of legacy owners. The power of restructuring allows legacy owners to step back from the day-to-day, remain involved, and add flexibility. Restructuring is an option for businesses with a strong management team that can continue profitable operations.

Customizing Your Transition

Transitioning the family business takes many forms. Advisers have a diverse set of tools and strategies to customize succession plans for different businesses. By keeping an eye toward tax, business and corporate considerations, they assist business owners in navigating the complexities of such changes. Transitioning could be from legacy owners to current management, intra-family or even a hybrid — all bearing unique considerations. Transitioning the business may be best for those owners looking to pass an income-producing asset onto future generations.

Navigating Your Options

Succession planning for the family business takes one of three main forms — selling, holding, or transitioning the business. In all circumstances, legacy owners can guard their visions with creative, yet comprehensive planning to keep their assets running in tip-top shape.

To seek counsel from our Business & Corporate group, please reach out to request a consultation or call us at 216-696-1422.

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Navigating Asset Transactions

Asset transactions have unique contours when compared against a stock deal. From the buy-side, buyers may depreciate assets based on purchase price. However, the downside is business successor liability. Under state law, buying assets may keep the buyer on the hook for unpaid state taxes. From the sell-side, asset sales likely create capital gain treatment. This is beneficial because of the capital gain rate break. However, sellers of assets may have potential “depreciation recapture.” To reiterate, it is crucial to emphasize that seasoned advisers, armed with extensive expertise, possess a range of potential planning opportunities designed to proactively mitigate and address the various tax risks inherent in such transactions.

Deciphering Complexity of Stock Sales

Stock sales, compared to asset deals, are generally more complex. Depending on the business entity form, the Code blesses some transaction structures as tax-free. On the one hand, buyers may choose stock deals for “tax-free reorganization treatment.” A tax-free reorganization is a creature of the Code and requires tax counsel. Sellers generally receive capital gain treatment on the sale of corporate stock. All in all, stock deals are complex, but advisers have levers in the Code to manage parties’ interest in a transaction.

Engaging an Expert for Strategic Deal Structuring

Before inking a letter of intent, engaging a skilled adviser to structure your deal ensures the most value is captured at the bargaining table. Advisers with both tax and transaction acumen have tools in their toolkit to bring a transaction to life while mitigating downstream tax liabilities. These experienced professionals not only navigate the complexities of deal structuring but also assess potential risks and opportunities, providing comprehensive guidance to optimize the overall outcome of the transaction.

For more information or to seek counsel from McCarthy Lebit’s Mergers & Acquisitions attorneys, please reach out to request a consultation or call us at 216-696-1422.

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Take Inventory of Business Contracts & Review the Fine Print

Compile a comprehensive list of all your business contracts. This includes leases, vendor agreements, client contracts, employment agreements, and other legal documents. Organize them and keep them in a centralized location so they are easy to access for future reference. Check the expiration dates of each contract to identify any that are nearing renewal or termination. To avoid any disruptions in service or legal troubles, be sure to prioritize contracts that are close to their expiration.

Review the fine print of your service agreements to refresh your knowledge of service offerings, deliverables, and hidden fees. Staying up to date on this information will help mitigate unfavorable surprises down the line that could negatively impact your business.

Assess Contract Performance & Identify Risks

Evaluate the performance of each contract to determine if the terms continue to align with your business objectives. Consider elements such as pricing, deliverables, service quality, and any changes in your business needs since the contract was first established.

Identify potential risks linked to each contract, such as ambiguous language, insufficient protections, or failure to comply with regulatory standards. Proactively addressing these risks can significantly reduce the likelihood of encountering future legal issues. Additionally, it’s crucial to confirm that your contracts continue to effectively serve your business and contribute to its seamless operation.

Negotiate Contract Updates & Document Changes

Contact the other parties involved in the contracts to discuss any necessary updates or revisions. This could include renegotiating pricing terms, updating the scope of work, clarifying ambiguities, or adding provisions to address new risks or business needs. On the other hand, this could include terminating a contract if it no longer serves the best interests of the business.

Seek Legal Counsel for Contract Review

Consult with your attorney to review all proposed changes or updates to your contracts. Their legal expertise can offer invaluable insights to refine and enhance your contractual arrangements. Your attorney can also verify that your contracts are in compliance with relevant laws and regulations.

Monitor Contract Compliance

Finally, consider establishing and implementing a formal process to monitor ongoing contract compliance throughout the year. Consistently reviewing contract performance, tracking key performance indicators, and promptly addressing any deviations from agreed-upon terms can support smooth business operations and risk avoidance.

By setting aside the time to review your business contracts this spring, you can help protect your business, streamline operations, and set the stage for future success. With careful planning and attention to detail, you can ensure that your contracts continue to support the goals and objectives of your business.

To seek counsel from our Business & Corporate attorneys, please reach out to request a consultation or call us at 216-696-1422.

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What is your business worth?

An owner needs to know the business’ value before trying to sell. That goes beyond income, revenue, debts and expenses — it is understanding what the company is worth on the open market. An owner may overestimate the value of their company, only to be disappointed with lower offers from potential buyers. An owner should get a professional valuation from a qualified adviser. There are many variables that go into a valuation so it may not be exact. However, it provides an owner with a clearer view of the state of the business. With that frame of reference, an owner is more equipped to handle offers.  

Assemble your team of advisors.

Owners often try to sell their business by themselves. After all, they know their company better than anyone. However, an owner may not understand how to fairly value their company, how to market it, how to negotiate legal documents, what the tax implications may be or how to manage the proceeds. There are many complexities in an M&A transaction which, if not handled properly, can lead to unfortunate results. Further, an owner still needs to operate the business so that it remains attractive to a potential buyer. An owner should assemble a team of professionals who can guide them through the process. Experienced investment bankers, accountants, M&A attorneys and financial advisers help an owner navigate their transaction, work through issues, and mitigate risks, all of which can lead to a successful transaction closing.

Understand your personal situation.

Selling a business will likely result in the largest liquidity event of an owner’s life. After debts are satisfied and taxes are paid, the owner will need to live off the net proceeds for their remaining days. It is important to confirm there will be sufficient funds for an owner to maintain their lifestyle. If that will not be the case, an owner may need to adjust their plans to avoid an unwelcome situation after closing. It is also important for an owner to have a proper estate plan in place to account for the influx of funds and make use of tax planning strategies.

For more information or to seek counsel from our business & corporate law group, please reach out to request a consultation or call us at 216-696-1422.

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Financial and Valuation Issues:

M&A deals often hinge on financial considerations and valuation. Disagreements over valuation methods, purchase price, and payment structure can instantly derail a transaction and lead to a failed M&A deal. Additionally, the seller’s perceived business value may differ from the market’s willingness to pay. Selling a business is typically the most significant financial transaction of an owner’s life. They must have a clear understanding of net proceeds (post-indebtedness, fees, taxes, etc.) to ensure it is sufficient for future needs. Accurate financial due diligence, transparent communication, and realistic valuation assessments are crucial to ensuring deal feasibility.

Disagreements Over M&A Deal Terms and Conditions:

Negotiating the terms and conditions of an M&A deal can be complex. Disagreements over deal structure, representations, covenants, or indemnification requirements can lead to a breakdown in negotiations and a failure to close the deal. Effective communication, compromise, and creative problem-solving are vital. A detailed and comprehensive term sheet, or letter of intent, is an effective way to reach mutually agreeable decisions at the outset before the parties move forward. This initial document will provide a road-map for preparing documentation consistent with agreed-upon terms, which can aid in reducing disagreements in the documentation phase of the deal.

Cultural and Organizational Misalignment:

Successful M&A deals require a certain level of cultural and organizational alignment between the parties involved. Incompatibilities in leadership style, organizational structure, decision-making processes, or operational practices can create challenges and raise concerns about post-merger integration. Conducting cultural due diligence, open communication, and addressing alignment issues early in the deal process are critical to ensuring compatibility. Furthermore, leadership meetings can help determine if values, approaches, and priorities align.

External Market Factors:

External market conditions and events can significantly impact the likelihood of a failed M&A deal. Economic downturns, industry disruptions, political uncertainties, or sudden shifts in market dynamics can alter the M&A landscape. The current inflationary environment has resulted in higher interest rates which may present financial difficulties, or even the inability to secure adequate funding. Staying vigilant, assessing market risks, and having contingency plans in place can mitigate the impact of external factors.

The above-mentioned factors add layers of complexity to M&A deals of all sizes. Enlisting the help of an M&A attorney with knowledge of transactional law, the art of negotiation, and merger & acquisition etiquette can help buyers and sellers surmount an impasse and achieve their desired goals at closing.

To obtain further information or engage one of our M&A attorneys for your deal, please reach out to request a consultation, or call us at 216-696-1422.

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A term sheet typically covers structural, financial, process, and legal matters such as:

• Deal Structure – Asset vs. Equity
• Purchase Price and Terms of Payment – Amount, Deferred Payment, Seller Financing
• Assumption and/or Exclusion of Liabilities – Payables or other obligations
• Due Diligence – Scope and Process
• Timing – Schedule of Events, from signing to closing
• Closing Requirements – Conditions Precedent, required approvals and consents
• Employment Matters – Retention or Termination, of owner and/or other key employees
• Post-Closing Considerations – Working Capital Adjustment and Business Transition Matters

The term sheet provides a road map for the parties as well as their counsel and advisors moving forward through this process. It will form the basis for drafting definitive documentation. If the parties disagree on certain terms, they will look back to the term sheet for guidance. This will help alleviate potential misunderstandings or sources of conflict.

That is not say that the term sheet is written in stone. Situations change during the course of due diligence and re-negotiation may be necessary in those instances. In such a case, it is appropriate to revisit the term sheet and revise accordingly. Absent such circumstances, however, it is considered bad form to re-trade terms previously agreed-upon in the term sheet as it may sour the relationship between buyer and seller or even derail the transaction.

While most terms are non-binding, there are certain provisions which are binding upon the parties such as:

• Exclusivity – Buyer has the exclusive right to consummate a transaction for a set period of time
• Confidentiality – Agreement not to disclose confidential information
• Non-Solicitation – Seller will not seek or entertain other offers
• Governing Law – Which State law governs with respect to interpretation of the letter of intent

The term sheet is the critical first step for a transaction and will set the path going forward. Before signing, a seller should consult with counsel and financial/strategic advisors to confirm that it accurately reflects their understanding of the pending transaction and properly accounts for all the material deal points.

For assistance reviewing your term sheet, please reach out to request a consultation or visit Mike’s bio for his contact information to reach out to him directly.

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