M&A: In a Sale Transaction, Watch Out for Consulting Arrangements

In an M&A transaction, the Buyer may only agree to pay part of the purchase price in cash at closing and the other part as a consulting fee to the Seller over time.   This of course has tax implications, given a consulting fee would be subject to ordinary tax rates, versus capital gains rates that may apply to the sale of your business.  And it is risky for the Seller, given the Buyer could default on the payments, and perhaps never pay them.  Of course, if the consulting fee is above and beyond what the Seller thinks is a fair sale price for their business, this possible consulting fee revenue is just icing on the cake.  But if the consulting fee is part and parcel of what the Seller believes the business is worth, this arrangement could well cut into the cake and result in the Seller receiving less than what the business is worth to the Seller.

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