How Do You Prepare to Sell Your Business?

Mark Fearon | February 20th, 2013

Do you plan to sell your business someday? Although you may not think of your business as a traditional retirement plan, it may be the largest asset you have to “cash in” upon retirement. There are many issues to consider when thinking about selling your business.

Timing of Business Sales

One of the first things a potential buyer is going to ask for is historical financial statements. If your most recent financial statements show healthy profits, you are more likely to be able to justify a larger selling price than trying to sell your business after several less profitable years.

Current developments in your industry may also impact the timing of when you want to sell your business. Do you anticipate new government regulations that could impact your business? Or is there a trend of consolidations in your industry? If so, this may increase the value of your business.

Business Sale Structure

You can either sell the stock of your business or the assets of your business. As a seller, it is normally beneficial to sell the stock of your company. However, most buyers will not purchase stock for fear of any “skeletons in the closet” that may linger with the corporation. Most buyers prefer to purchase your assets and place them into their own corporation or LLC.

Do you want to continue working for the new owner after you sell your business? It is often beneficial to the future of the business if the seller stays in place to work with the buyer through the transition phase. You may need health insurance so it may make sense to stay on the payroll.

If you want your buyout price to have the potential to increase if future sales are strong, consider an earn-out clause. For example, an earn-out clause might say the buyer receives 20 percent of gross sales for the first year following the sale. Buyers often request an earn-out clause when they have concerns about maintaining a customer base.

Income Tax Impact of Business Sales

The key number is how much you’ll receive from the sale after taxes. Obtain tax advice throughout the transaction to hopefully reduce the tax liability on the sale. If you sell the stock of your corporation, you will likely be taxed at the more favorable capital gains rate. However, very few buyers will purchase stock so more often than not, buyers purchase assets.

In an asset purchase, the allocation of the selling price is crucial. The total sale proceeds need to be allocated to the various assets being sold. If the entity selling its assets is a pass-through entity such as an S-corporation or an LLC, the gain on the sale of equipment is taxed at a higher rate than the gain on the sale of goodwill. The tax rate on the sale varies with the different assets being sold. An allocation that is more tax-friendly for the seller is often not as favorable for the buyer. Accordingly, the allocation of the selling price is often a provision of the purchase agreement that undergoes a fair amount of negotiation between the buyer and the seller.

As you can see, there are numerous issues to consider when selling your business. Never go it alone. Have your attorney either prepare or review the legal documents on your behalf. And use your accountant to help structure the details of the sale in an effort to minimize the tax impact. An accountant should also review the legal agreements to evaluate the terms from a tax standpoint.

Business Transition Help

Thinking about selling your biggest asset? Not sure how to develop a plan that accounts for time, structure of the sale, and income tax impact? It’s a big transition, but you don’t have to do it alone. Contact Rea & Associates.  Our Ohio business planning team will help you develop a plan that makes sense for you and your business. You’ve worked hard to build your business; you deserve to enjoy the fruits of your labor in a comfortable retirement. We can help you do that.

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