How can we evaluate an S corporation for an acquisition?

There are several things to consider about the S-corp in question before you decide to buy it. Like Wray said, you’re essentially buying a revenue stream. If you’re buying it from the current owners, you need to think about who will run the business. Will it be you or will you need to hire people to perform the services? If you must hire someone, at least some (if not all) of the funds currently going to the current owners would be paid out to the person running the business. You didn’t state the type of virtual services. You might want to double check that the current owners really are paying themselves up to 70% more than the market rate. Keep in mind factors like their experience, their client demographic, and what makes the company stand out to the point that people are willing to pay so much more for those services.

Some things to watch for:

– Make sure that you look at the tax returns for the business.

– Is there any debt? If the owners or their CPA (if they have one) says that there is no debt, make sure that you get that in writing.

– Are there any current legal problems or potential ones that could crop up? Make sure that you do more than check the courts under the business name. Look under the names of the owners as well. You might want to do a search on the Internet to look for complaints.

Now, depending on how you decide to form the entity could create a bit of lag time between the time it is created as your business and when you can begin to legally operate the business. So, if you’re wanting to begin to profit from the revenue now, make sure that you leave things alone and talk to an attorney before you make any business formation decisions.

When the purchase happens, do it the right way (meaning the way that benefits you as the buyer). Talk to an attorney to determine if the purchase qualifies as a Section 338(h)(10) election. Then, it’s treated as an asset sale for tax purposes. You and the seller will have different tax consequences. I know you said that there aren’t a lot of assets, but the assets that do exist will come to you at fair market value.

Other S-corp buy / sell options include:

– The sale of personal goodwill.

– Direct stock transaction even without a Section 338(h)(10) election.

– Direct asset transaction.

Whatever you choose, consider how it will affect your:

– Gains tax.

– State taxes.

– Purchase price allocation.

– Your tax benefits as the buyer.

Make sure that you get legal advice from an attorney and make sure that you tell the lawyer everything that you know about the S-corp. This is the best way for you to get the advice that you need to determine if you want to buy the business and if so, the best way for you to go about doing it. LawTrades is a legal marketplace and we help people just like you get the legal advice (at an affordable rate) that they need so that they can make educated opinions. We’ve helped thousands of people start businesses and we’d love to answer your question.