Posted on 12th Feb, 2009
by Michael
in Reference
When structuring the sale of a home health agency, a few simple ideas (and some smart lawyering) might mean the difference between paying over 45% of the sale proceeds, and a more modest 20% of the proceeds. Your transaction must be deftly negotiated though–because what’s good for a seller can impact the buyer going forward. Of course (here comes the disclaimer) you’ll want to review your specific situation with your accountant.
Selling a Health Care Company in a Stock Sale
A stock sale transaction takes place when a health care company owner simply sells his corporation’s stock (or LLC’s units) to a buyer. The stock transfers to the new owner, as well as all vestiges of ownership, such as licenses, leases, real property, assets, and contracts. It is certainly the simplest method of company transfer.
There is another tangible tax benefit to the seller: if the seller has owned the corporation’s stock for more than a year, the sale of the corporation’s stock qualifies as a long-term capital gain–and is taxed at favorable rates of near 15% (the rates have some ins and outs, but 15% is a likely rate in most transactions).
But, a stock sale my not be the favored structure from a buyer’s perspective. While taxes and Medicare liabilities will follow the agency to the new buyer regardless of the transaction’s structure, a stock sale will expose the buyer to other liabilities arising from the agency’s past operations. An example of such an operational liability might be a slip and fall injury from someone visiting the company headquarters, or an unpaid bill for services rendered to the agency.
And, a buyer may also find unfavorable allocation rules within the stock sale model. If a buyer purchases a corporation, he accepts the balance sheet as he finds it: items on the balance sheet are valued for tax purposes at book value. An example would be a $50,000 computer system previously depreciated down to $5,000–leaving very little depreciation for a new buyer.
Selling a Health Care Company in an Asset Sale
An alternative to a stock sale is an asset sale. In an asset sale, as the name implies, the assets of an ongoing enterprise are sold to a buyer. An asset sale leaves the former operating corporation or LLC in place–the prior owners remain as owners. Of course, when the assets are sold, the owners are left owning a non-operating entity that has received cash in exchange for its operating assets. The cash is then distributed to the owners.
Generally, buyers have a preference for asset sale transactions. First, a buyer in an asset sale restricts his exposure to past corporate liabilities. And, a buyer in an asset sale takes the assets with a stepped up basis–and can therefore depreciate the assets anew.
Sale of an Agency by a C-Corporation in an Asset Sale
An asset sale by a C-Corporation can produce undesirable tax consequences. In an asset sale, if a C Corporation sells its assets, the C Corporation remains intact, and the sale of assets is taxable income to the Corporation. As such, the corporate tax rate on such income is taxed up to the maximum rate of 35%. Thereafter, in the inevitable distribution of proceeds to shareholders the cash distributed is taxed as either a dividend or a long term capital gain, at a 15% rate. This dual taxation yields a hefty tax, and depending on the circumstances, can easy reach a percentage in the high 40s.
There are way to reduce this tax burden.
One fairly common method is to allocate some of the sale proceeds to a personal service contract by a shareholder/manager; for example, a non-compete agreement. Because the party to the personal contract is not the Corporation, the income bypasses the Corporation and is taxed directly to the individual. Individual income tax rates are high, but this method does avoid the double taxation outlined above.
Here’s another idea. If the Corporation’s owner can demonstrate that the owner is responsible to any extent for the business’ goodwill, then the goodwill can be attributed (either in whole or in part) to the individual rather than the corporation. This way, the owner would receive income as capital gain (with favorable tax treatment), and the income will bypass the Corporation.
Limitation on Conversion to S-Corp — § 1374
In case the burdens of C Corp taxation have you thinking “I’ll simply convert to an S-Corp immediately before the sale of my business”, the IRS has anticipated that maneuver. The IRS drafted § 1374 which imposes a C Corp tax rate (of 35 percent) if the business recognizes gains within 10 years of the conversion. There are some ins and outs that an accountant can help navigate, of course, but 1374 will prevent most conversions.
Sale of an Agency by a C Corporation in a Stock Sale
Turning now to the circumstance where a C-Corporation is sold in a stock sale, the owners own the C Corp which in turn owns the agency. The selling owners sell their stock in the C Corp, and therefore receive capital gains treatment on their proceeds. As a starting point, this is generally desirable to owners. From the buyer’s perspective, though, the buyer enjoys no step-up in its tax basis, and there is always the potential for unforeseen liabilities that would potentially be attributable to the Corporation.
Sale of an Agency by an S Corporation in an Asset Sale
S Corporation income passes through the entity to the shareholders. As such, the double-taxation incident to C Corporation income does not apply. Specifically, in an asset sale, assets sold by an S Corp cause income to flow directly to the shareholders–and are taxed as ordinary income.
The key to maximizing tax benefit in an S Corporation asset sale is how the income from the sale is allocated. Ideally, a seller will want to have some of the agency’s value characterized as capital gain rather than ordinary income. That can be achieved through the allocation ideas expressed above.
Sale of an Agency by an S Corporation in an Stock Sale
The sale of an agency through a stock sale by an S Corporation is closely akin to the sale of an agency by a C Corporation.
Tags: asset sale, home health, taxation
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Posted on 29th Dec, 2008
by Michael
in Reference
One question we are often asked, either through our consulting or in connection with a transaction, is how a home health agency is evaluated for purchase.
What Is My Home Health Agency Worth?
The key to home health agency (and home care agency) valuation, as with most businesses, is financial performance.
A home health agency that earns a sizeable amount of Medicare revenue is most desirable to a purchaser. Medicare revenue is deemed to be reliable and suitably generous. As such, Medicare revenue serves as a great starting point for evaluation by a purchaser. And, because Medicare payments are standardized, purchasers will value a home health agency by applying a multiple of Medicare revenue. Profitability is less important in a Medicare environment because each purchaser will bring their own delivery model once they complete an acquisition. Typically, we see valuations that are in the range of 1.1 to 1.5 times Medicare revenue.
Other Valuation Factors
There are, of course, supplemental factors that can nudge a valuation upwards or downwards. One important factor is if the agency is within a jurisdiction governed by certificate of need (CON) restrictions. A certificate of need is a state-granted authority to operate a home health facility. CON states, because they restrict the number of home health agencies, generally cause an increase in demand for existing home health agencies. A CON market creates artificial demand for an agency’s services. As such, the value of such agencies tends to be higher. To learn if you are in a CON state, please visit our CON State Reference.
The converse is also true. An agency in a crowded market will generally fetch a lower multiple even if that agency is performing well.
Another factor is the revenue and profit trending. If an agency’s financial performance is trending upwards, then a potential buyer may “look ahead” and accept a price that takes into account a reasonable expectation that financial performance will continue to improve in coming years.
Rural agencies tend to fetch discounted valuations; such agencies tend to be less in demand. Rural areas tend to grow in population more slowly, and as a consequence rural agencies tend to grow more slowly.
If you would like to discuss your agency’s valuation with a broker, please reach out to us.
This article by Michael David of Medical Website Design.
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Posted on 8th Jul, 2008
by Michael
in Reference
Acquisition:The purchase of one corporation by another, through either the purchase of its shares, or the purchase of its assets.
Administrative Dissolution: The involuntary dissolution of a corporation by the Secretary of State, or other equivalent department, due to the failure of a corporation to meet statutory requirements such as periodic filing and tax reporting requirements.
Annual Meeting of Directors: A meeting held each year to elect officers of a corporation, and to address other corporate matters. Usually follows immediately after an Annual Meeting of Shareholders.
Annual Meeting of Shareholders: A meeting held each year to elect directors of a corporation, and to address other corporate matters.
Articles of Incorporation: The document which gives birth to a corporation by filing in the state of incorporation. Articles cover foundational matters such as the name of the corporation, the shares it is authorized to issue, its corporate purpose, and its agent for service of process.
Authorized Shares: The number of shares of a corporation’ s stock that the corporation has the authority to issue. The authorized shares of a class of stock is stated in a corporation’ s articles of incorporation.
Blue Sky Laws: The securities laws of individual states, collectively. These laws seek to protect people from investing in sham companies companies that offer nothing more than ‘blue sky.’
Business Judgment Rule: The rule that shields directors from liability for mismanagement of the corporations that they serve.
Bond: An interest-bearing instrument issued by a corporation or other entity that serves as evidence of a debt or obligation.
Bylaws: The internal operating rules of a corporation, usually set out in a five- to twenty page document. Bylaws govern such matters as holding meetings, voting, quorums, elections, and the powers of directors and officers.
C Corporation: Any corporation that has not elected S Corporation status.
Certificate of Authority: A document issued by the secretary or state or equivalent department that authorizes a foreign corporation to operate in a state other than its state of incorporation.
Certificate of Good Standing: A document issued by the secretary or state or equivalent department that certifies that a corporation in validly existing and in compliance with all periodic and taxation requirements.
Close Corporation: A corporation owned by a small number of individuals. Corporations must elect to be close corporations by inserting a statement in their articles of incorporation. State laws typically permit close corporations to be operated more informally than non-close corporations
Common Stock: A corporation’ s primary class of stock. Common stock holders typically have voting rights.
Corporate Secretary: A corporate officer, elected by the directors, usually charged with record-keeping responsibilities.
Deadlock: The circumstance that arises when either the board of directors or shareholders are evenly split on a vote and cannot take action. Deadlock can lead to judicial resolution of the underlying dispute.
Debt Financing: A method of financing where the company receives a loan and gives its promise to repay the loan. See also: Equity Financing.
Dilution: The effect of reducing an existing shareholder’ s interest in a corporation when new shares are issued.
Director: The directors of a corporation are its governing board. Elected by shareholders, they vote on major corporate matters such as the issuing of shares of stock, election of officers, and approval of mergers and acquisitions.
Dissolution: The process of shutting down a corporation, settling its affairs, and ending its life.
Distribution: A transfer of profits or property by a corporation to its shareholders.
Dividend: A share of profits issued to the holders of shares in a corporation. Dividends can be paid in shares of stock or other property such as shares in a subsidiary or parent company.
Doing Business As (DBA): A company whose operating name differs from its legal name is said to be ‘doing business as’ the operating name. Some states require DBA or ‘fictitious business name’ filings to be made for the protection of consumers conducting business with the entity.
Domestic Corporation: In general, a corporation whose articles of incorporation are filed in the state in which it operates and maintains its principal office.
EBITDA: Earnings before income taxes, depreciation, and amortization. Ebitda is a widely used measure of the financial performance of a company.
Equity Financing: A method of financing where a company issues shares of its stock and receives money. See also: Debt Financing.
Fictitious Business Name: A company whose operating name differs from its legal name is said to be doing business under a fictitious business name. Some states require DBA (doing business as) or fictitious business name filings to be made for the protection of consumers conducting business with the entity.
Fiduciary Relationship: A special relationship in which one party, the fiduciary, owes heightened duties of good faith and responsibility to the other party.
Foreign Corporation: In general, a corporation that operates in one state but whose articles of incorporation are filed in another state; the state in which it operates refers out-of-state corporations as ‘foreign.’ The term also refers to corporations chartered in foreign nations.
Franchise Tax: A tax levied in consideration for the privilege of either incorporating or qualifying to do business in a state. A franchise tax may be based upon income, assets, outstanding shares, or a combination.
Fully Reporting Company: A public company that is subject to the Securities and Exchange Commission’ s periodic reporting requirements.
Good Standing: A state a corporation enjoys when it is in full compliance with the law.
Illiquidity Discount: A discount in the value of an interest in a business because of legal restrictions on the resale of such interest.
Incorporator: The person or entity that organizes a corporation and files its Articles of Incorporation. The incorporator can take corporate actions before directors and officers are appointed.
Involuntary Dissolution: The forced dissolution of a corporation by a court or administrative action.
Liquidation Preference: Certain classes of stock (usually preferred stock) may have a liquidation preference, which entitles the holders to be paid first in the event of the liquidation of a corporation’ s assets.
Limited Liability Company (LLC): A new and flexible business organization that offers the advantages of liability protection with the simplicity of a partnership.
Limited Partnership: A business organization that allows limited partners to enjoy limited personal liability while general partners have unlimited personal liability.
Merger : The combination of one or more corporations into a single corporation.
No Par Shares: Shares for which there is no designated par value.
Nonprofit Corporation: A business organization that serves some public purpose, and therefore enjoys special treatment under the law. Nonprofits corporations, contrary to their name, can make a profit, but cannot be designed primarily for profit-making. Distributions upon liquidation typically must be made to another nonprofit.
Officer: The managers of a corporation such as the President, CFO, and Secretary. The officers are appointed by the board of directors.
Par Value: The issued price of a security that bears no relation to the market price.
Parent Corporation: A corporation that either owns outright or controls a subsidiary.
Partnership: A business organization formed when two or more persons or entities come together to operate a business for profit. Partnerships do not enjoy limited liability, except in the case of limited partnerships.
Pierce the veil: Doctrine that attaches liability to corporate shareholders in cases of commingling of assets and failure to observe corporate formalities.
Preemptive Rights : Rights enjoyed by existing shareholders to purchase additional shares of stock in the same proportion to their existing holdings.
Preferred Stock: A separate and/or secondary class of stock issued by some corporations. Preferred stock typically has limited or no voting rights, but its holders are paid dividends or receive repayment priority in the event the corporation is liquidated.
Proxy: An authorization by one shareholder giving another person the right to vote the shareholder’ s shares. Proxy also refers to the document granting such authority.
Qualification: The process by which a foreign corporation registers in a state of operation other than its state of incorporation.
Quorum: The minimum percentage of either shareholders or directors that must be present at a meeting in order for a vote to be legally effective.
Record Date: The date used to determine
Redemption: A repurchase of shares from shareholders by a corporation.
Redemption Rights: Right of repurchase enjoyed by a corporation that exist for certain shares of stock.
Registered Agent: The person or entity that is authorized to receive legal papers on behalf of a corporation.
Registered Office : The official address of a corporation. Typically this address is the same as that of the registered agent.
Resident Agent: The person or entity that is authorized to receive legal papers on behalf of a corporation.
S Corporation: A ’subchapter S’ corporation is a corporation that elects by filing with the IRS to be treated as a partnership for taxation purposes.
Secretary (Corporate Secretary): A corporate officer, elected by the directors, usually charged with record-keeping responsibilities.
Shareholder: An owner of a corporation and one who holds shares of stock in a corporation
Shareholder’ s Agreement: An agreement between the shareholders of a corporation that can cover various matters such as a commitment to vote particular persons as directors and
Shelf Corporation: A fully formed corporation without operations, assets, or liabilities that remains in inventory, or on a ’shelf,’ waiting for a buyer. The advantages: a shelf corporation can be operating within hours, and uses its original formation date.
Simple Majority: With respect to shareholder and director voting, more than 50%.
Sole Proprietorship: Simply, a business owned and managed by one person. Sole proprietorships do not enjoy liability protection.
Subsidiary: A corporation that is owned outright or controlled by a parent corporation.
Voluntary Dissolution: The intentional dissolution of a corporation by its own management.
Winding Up: The process of paying creditors and distributing assets that occurs before the dissolution of a corporation.
Written Consent: A document executed by either the shareholders or directors of a corporation in lieu of a formal meeting.
written by Medical Website Design Pros
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