When it comes to thoughts of retirement, or simply wishing to move on to other adventures, many business owners hope that trusted employees or family members will be able to step up and take over the business. This may occur through a purchase or some other form of transfer, especially to a family member. However, there may likely be situations where this type of new ownership is not possible or practical, and the business owner will have to look outside the business to find a buyer.
An outside sale can be financially beneficial, especially if there is more than one interested buyer, but a sale transaction will usually require more effort and time than transferring the business to someone you already know. Be prepared to do some work to put some shine on your business!
A potential purchaser will want to know many details about your business—things an insider would take for granted. Prepare for multiple requests for information. One option is to hire an independent appraiser to determine the value of the business. Once your books and records are in order, the appraiser can provide the necessary evaluation. With that information in hand, you can set a selling price that may eliminate some potential buyers, but will inform the serious buyer that you know the value of your business, and you’re ready to entertain significant offers.
As part of the sale of your business, there are a number of potential areas of negotiation other than the selling price. For example, if your business is renting its operating facilities from you (or an LLC you own) personally, what would be the lease terms for a new owner of the business? A new owner might want you and/or other key employees to continue working in the business for a specified period of time. This would certainly be important if the purchase has an “earnout” component, where the seller could receive additional payments based upon the future performance of the business.
Structuring the actual terms of the sale is a very important aspect of the purchasing process. As the seller, you want as much cash in your pocket as possible, while the buyer generally has just the opposite plan—to pay the least amount necessary to seal the deal.
Income taxes have a great effect on the amount of cash available to the owner. For example, receiving a large amount of cash on the sale all in one year will likely create large amounts of tax, even if the sale is all taxed at capital gain rates. There are many surtaxes and phaseouts that could affect your tax situation, so this often makes an installment sale more appealing. Of course, this comes with greater risk, so often an installment sale will be made at a premium.
Another income tax effect is generally traced to the buyer. For someone purchasing a business, the best tax result is usually to purchase assets, since those assets may generate large depreciation deductions. For the seller, the best tax result is to sell the stock of the business, as the resulting profit will be taxed at capital gain rates.
In both of these situations, consulting a tax professional will help structure a deal that will put the seller in the best position. This may mean agreeing to a sale of assets, but for a higher price, so that the seller maximizes the cash after taxes. Our office has a great deal of experience in assisting with business sales and purchases. Please feel free to contact us with your questions and concerns.