Tax and Other Considerations in Selling or Gifting a Trucking Business

A version of this article was originally published in BeyondTrucks in February 2023.

Some trucking companies founded in the 1980s and 1990s—the era after the 1980 Motor Carrier Act began the deregulation of the interstate transportation industry—have become sizable, family-owned businesses.

Their founders, many of whom are still actively involved in day-to-day operations, are now assessing their transition alternatives, balancing personal financial needs, and protecting their legacy. This series of articles on business transitions in the trucking industry discusses business valuation methodologies and the benefits of incorporating technology when deciding to sell or gift the business.

This article discusses two paths an owner could take to transition out of the business, and key considerations for each, which are:

  • Selling the business to a third-party or key employees
  • Succession planning, gifting the business to the next generation

Also discussed are other elements of planning, namely personal finances and pre-transactional planning.

Pre-transaction Planning

Typically, trucking company owners consider selling to an unrelated party only after having assessed whether existing family members are able or willing to manage the business. While keeping a business in the family may take precedence over purely economic considerations, owners should assess if selling would be a good option for unlocking wealth from the business and reallocating assets.

Entity Preparation for Sale

A transaction is the sum of many moving parts, from structuring and negotiating to managing the details and parties involved. If your organization increases team accountability and avoids common pitfalls, the transaction is more likely to go as planned. Strive for a deep understanding of your company’s critical performance metrics, monitor those metrics with clear, measurable strategies to help create future value.

The quality of the management team determines much of a company’s strength—and therefore much of its value. A buyer will need to be confident the company will continue running smoothly after it changes hands. Establishing a strong management team and continuing to restructure the team to reflect your business’s growth or changing needs can help instill greater buyer confidence.

Investing in professional accounting practices such as closing books at least monthly and having annual reviewed or audited financial statements creates an accountable and disciplined accounting department.

Financial Preparation for Sale

Knowing what you’ll face when due diligence begins—and preparing effectively—can help a company position itself for better negotiations, higher valuations, and stronger outcomes.

When selling all or part of your business, nothing can replace being proactive about pre-transaction planning and applying due diligence. Effective preparation not only readies your company for the transaction process, it improves sale conditions.

Answering the following questions before you go to market can provide you with confidence in your position and help you avoid surprises:

  • Have you prepared a sell-side quality of earnings (Q of E) report?
  • Have annual financial statements been reviewed or audited? Have you identified pro-forma adjustments to your financial statements for one-time costs or adjustment of related party or non-business transactions? Are internal financial statements up to date?
  • Have you identified policies that don’t comply with US generally accepted accounting principles (GAAP)?
  • Have you identified key risk areas?
  • Have you performed detailed reviews of all business and legal contracts?
  • Does your company have significant uncertain tax positions or unasserted legal claims a buyer could identify?

Having a professional perform sell-side due diligence can help manage internal resources and identify potential gaps.

Having the buyer be the one to first identify a material issue should especially be avoided, for it leads to reduced purchase price, additional scrutiny in all areas, delays, or even termination of the transaction.

Choosing an investment banker or advisor well-versed in your industry is crucial as they will be developing and helping you understand your company’s valuation model, demonstrating potential future value from synergies to buyers, and will lead the marketing and sale process of your company.

Selling the Business to a Third-Party or Key Employees

This section may also be helpful in preparing the company for a sale a few years down the road. Many actions that can enhance the financial proceeds from a sale require time to improve the optics of strongpoints or mitigate weaknesses in the company.

Strategic Considerations when Selling the Business

Unique Strategic Advantages

Consider these questions:

  • What unique competitive assets does the company have that no or few others possess?
  • How do such assets affect the level and certainty of future profits?

Some potential answers are:

  • Location advantages anchored by ownership or long-term leases of critical facilities
  • Access to drivers and equipment in strategic locations
Key Person Risk

Consider these questions:

  • How much is the business anchored around the founder?
  • How sustainable are profits after the founder exits from the business and is no longer personally involved?
  • What incentives does the founder have to support an orderly transition where the value of the business stays intact?

Indicators of low risk include:

  • Governance and management structures that balance both delegation and critical controls in the organization
  • Succession and transition plans
  • Reliance on systems to maintain standard operating procedures without day-to-day founder or owner involvement
Strategic synergies

Consider these questions:

  • Can a buyer unlock more value from the fleet than the seller?
  • What buyer would that be?

An example would be a third-party logistics (3PL) firm targeting large national accounts that can benefit from capacity where the fleet is. In that instance, the buyer may rely on its unique presence in a specific market to win national contracts for the rest of its business across the country, even though the fleet acquired serves only a small subset of it.

Market Timing

Freight markets are cyclical. Understanding expected market trends can help to determine whether the multiple applied to your cash flows should be higher or lower than historical transactions. All sellers being exposed to market forces and market data is generally public information, so while market timing won’t necessarily create any unfair advantage, it can still offer certain advantages to a seller.

An example would be a trucking company that decides to sell shortly after freight rates have bottomed out. The owner understands this and convinces potential buyers that current profits are depressed and that the future is much brighter. This may be an easier sell than at peak market where buyers are skeptical about revenue sustainability when everyone expects rates to decline.

Opportunities to Bridge Price Gaps

What happens if you won’t secure the price you expect for your business? What flexibility do you have to bridge price gaps? Work with your advisors on how this fits into your overall financial and retirement plan.

Tax Considerations when Selling the Business

Selling a business and then determining the resulting tax liability isn’t as straightforward as just multiplying tax rate by selling price or net proceeds. There are many variables that impact the actual gain on the sale and applicable tax rates.

The current federal tax rates as of 2023 that can apply to the sale of a business include the long-term capital gains rate up to 23.8%, the ordinary tax rate up to 37%, and the corporation tax rate up to 21%, plus applicable state income taxes which range from 0% to over 13%, depending on the state.

The entity type of the business—C corporation, S corporation, partnership, LLC, or sole proprietorship—has an impact on the tax rate applied to a sale of a business.

Advantages and Disadvantages of Different Entity Structures

Depending on how a deal is structured, C corps are often subject to double taxation. If the transaction is structured as an asset sale, the corporation would pay tax at the entity level and then the individual owners will pay taxes at the individual level when proceeds from the sale are distributed to the owners. A transaction structured as a stock sale would typically allow for a single layer of tax for the C corp owners.

For partnerships, LLCs, S corps, and sole proprietorships, there’s generally one layer of tax at the individual level, whether structured as an asset or stock sale, which generally leads to a lower tax rate on the sale, particularly with an asset sale.

Consult with your tax and legal advisors for advice regarding the preferred entity type for your business structure.

Implications of Deal Structure

In addition to the entity type of the business, how the deal is structured has implications for tax and net proceeds after taxes. This includes whether the deal is structured as an asset sale, which involves selling the assets, including goodwill of the business, rather than selling the equity interest in the legal entity itself. The other type is an equity deal, basically selling the legal entity itself. Each has its advantages and disadvantages based on the type of entity, structure of deal, basis in assets, and other factors.

Tax Considerations when Gifting a Business

Gifting is another common way to transition ownership. Often, this will be to a close relative, such as children active in the business, although gifts can be made to anyone. With a closely held business, navigating the family dynamics of fairness and equity when gifting or selling a business to the next generation certainly presents challenges.

Gifting a business can have tax consequences. Under current federal law, the 2023 lifetime exemption for gifting is $12,920,000 for an individual or $25,840,000 for a married couple. Once the lifetime exemption is used, anything gifted or remaining in the estate at death is taxed at the estate tax rate, currently approximately 40%.

For business owners with highly valued companies, taxes can be significant.

The existing law is scheduled to sunset at the end of 2025 and the available lifetime exemptions will revert to $5 million, indexed for inflation. Of course, legislative changes can always accelerate, defer, or modify the current rules. In addition, many states have a state level estate or gift tax.

When gifting instead of selling to the next generation, it may be beneficial to do this when the company value is low. It’s wise to plan as early as possible rather than waiting until the business has appreciated significantly and the options are more limited

Strategies with trusts can help preserve wealth and allow for more control over how the assets are managed after gifting. These strategies can include using a grantor retained annuity trust (GRAT) sale to an intentionally defective grantor trust (IDGT) and using valuation discounts by gifting minority interests of the business.

Succession Planning and Gifting the Business to the Next Generation

Many family businesses are very efficiently managed because one key person has significant operational and fiscal control. That makes particular sense in smaller organizations or when ownership remains concentrated with one family member who’s also heavily involved in the day-to-day business. That said, succession planning can be a great opportunity to unlock opportunities for growth.

Strategic Considerations when Gifting the Business

Transitioning Operational Management

Owners typically delegate certain aspects of day-to-day operations to staff. However, in many small- and medium-sized fleets, ownership maintains deep operational involvement, keeping core processes anchored to only a few individuals. One opportunity succession planning can introduce is strengthening the company by generating sustainable cash flow irrespective of management and staff changes.

Many who run their companies seem to run by force of habit, but those that scale their business can use more formalized standard operating procedures (SOP). While SOP manuals were commonplace for a long time, today SOPs can be implemented via workflow technology. Technology can help ownership formalize, standardize, and streamline processes while gathering data about activities and actions in the business.

Having a cohesive technology infrastructure already in place when handing a trucking company over to the next generation is a great benefit. Carriers can use this opportunity as a welcome project for the retiring generation to engage the next one, while also demonstrating a deep understanding of business operations.

Building Visibility

Acquiring trust can slow the process of a smooth handover. Offering retiring managers continuous real-time visibility into all aspects of the business can be one of the most powerful tools for new management building trust. In this context, visibility ultimately refers to real-time informational transparency that can be established easily with technology.

It’s not uncommon that transportation businesses, especially those founded in the 1980s and 1990s, run on technology that has limited real-time capabilities. For example, one 750-driver carrier’s CFO only gets a good picture of the financial state of the business 10 days after each months’ closing.

With new transportation management and accounting systems properly integrated, financial managers can reconcile management and financial reports, understanding the full state of the business at any given point in time. Cutting edge technology can be a major facilitator to build transparency and trust and allows for continued mentorship by the retiring team.

Management Controls

Beyond the knowledge made accessible through real-time visibility, the retiring generation can begin phasing out involvement in critical operational decisions. Your technology stack, if properly developed, not only could facilitate how visibility is presented, but also incorporate critical management controls into your business.

Transportation management and accounting systems can protect certain managerial controls for retiring owners, formalizing the need for managers to obtain their sign-off as workflows get routed back to them.

A second, helpful tool applicable in conjunction with governance controls is a control matrix that clearly outlines decisions that can be made by management with or without the involvement of more senior decision makers.

Matrices typically cover the budgeting, commitment, and payment control processes and institutionalize controls for critical decisions, typically by level of materiality or dollar amounts.

Ownership Transition, Governance Controls

Take standard management controls one step further and consider clear separation of ownership from management with a board of directors safeguarding ownership interests and delegating authority for some operational decisions to management. Formally defining board and managerial discretion can be helpful in empowering the next generation while the retiring owner-managers retain control and information rights over critical decisions that can affect the value of their ownership stake.

There are two main ways to transition ownership of a trucking company:

  • Selling to an external strategic buyer, such as a competitor or private equity
  • Transitioning to key employees, or to a family member through a sale or gifting

Each has tax implications and impacts the business owner’s retirement plan.

Personal Financial Planning

Beyond tax considerations, personal and family financial planning should also be considered. A business owner will need to have enough cash flow to retire on. When going through the process of determining the fair market value of the business and tax impact from the sale, ask if the net proceeds will comfortably fund the business owner’s goals. Will the business owner have enough to cover medical costs, philanthropic goals, travel, and other things? Working with a financial planner is very important in this process to help meet business owner’s goals.

Overall, this process will likely affect the decision to sell or gift the business.

We’re Here to Help

This article is part of a series also covering:

  • Estimating the value of a trucking business
  • Relevant tax and technology issues

For guidance on pre-transaction planning or how to navigate tax strategies, contact your Moss Adams professional.

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