Many entrepreneurs dream of the day that they can sell their business. However, selling a small business isn’t as simple as preparing to sell a publicly traded stock or even a home. This is how to approach selling your business, along with some financial and tax considerations to bear in mind.
Get Prepared
In preparation for your business sale, you’ll need to clean up your books, ensure your financial statements are up-to-date, and obtain a valuation for your business. How much businesses are worth varies widely between industries but is often some multiple of revenue plus the value of any physical assets owned by the business, such as properties and equipment.
Maximize Value Where Possible
If your aim is to increase your company’s valuation, it’s important to understand some of the changes that can increase the price you may be able to fetch. Clean books and accurate financial statements are a good start, but you’ll need to be able to show attractive metrics, such as strategies implemented to increase profitability, acquisition of new long-term customer contracts, and great employee retention if you have employees. You also want to make sure that your company can run well and be successful without you if you plan to fully transition out immediately.
Hire Appropriate Professionals
Here are some professionals you may want to consider hiring to prepare for your business sale:
- A bookkeeper to assist with financial statements and cleaning up the books.
- A valuation specialist to estimate the worth of your company.
- A business broker to support with making your business marketable and locating a buyer.
- A tax planner to strategize taxes in advance of the sale and support with filing once the sale is complete.
- A lawyer to draft a sales agreement and assist with the legal complexities of the sale.
- A qualified financial planner to navigate goals and sales strategy along with the tax planner, and support with diversifying the funds once the sale is complete.
Determine The Best Structure For You
Your specific financial and personal goals will determine the best sales structure for you. While the ability to choose may be limited by who is willing to buy your company, it’s important to reflect on what you want before entering an agreement. Here are a couple examples:
- Your goal is to take the money and immediately move on to your next venture. In this case, you’ll want to focus on the kinds of buyers who can offer all cash or as much upfront as possible without requiring that you stay on board during a transition period.
- Your goal is to make better money without working as hard. In this case, an installment sale and keeping you on board during a transition period might be more attractive. Depending on your personal outlook on your company, you may also want to retain some equity to participate in its growth.
Some additional considerations you may have would be around how to classify the sale of your company. That sale can be considered an asset sale or a stock sale.
Selling your company as an asset sale can allow you to take the aspects of your company in piecemeal. You can choose to include or exclude specific assets and liabilities of your business in the sale. However, if your company is or has ever been considered a C-Corp, you could face double-taxation. You could also end up facing ordinary income tax obligations, which are higher than capital gains taxes on the same sale amount.
If you sell your company as a stock, you cannot exclude specific assets or liabilities from the sale. This sale would be subject to strictly capital gains and doesn’t run into issues of double-taxation or ordinary income taxation. Depending on the purchase agreement, you may remain on the hook for future liabilities or be required to wait a specified period of time to cash out. I would strongly urge consulting a tax planner about your personal situation to determine the best structure for you.
Selling your business ideas to the best buyer.
Find Your Buyer
Who is an appropriate buyer for you ultimately depends on your goals for the sale. As mentioned before, this is where a business broker can be of immense help.
If your potential buyer is an individual investor, it’s likely that they will require debt financing or spreading payments over time. An all-cash offer may be difficult to come by and they may not have financial flexibility to negotiate. They will likely want to hold onto your business over the long run as an income-producing asset.
If your potential buyer is a strategic buyer, or a competing or supplying company, they may be working with their own legal team to prepare an agreement themselves. Be sure to review all the terms and work with your own lawyer to ensure this is the right deal for you. They may also choose to hedge their bets by offering a stock payout with holding periods to ensure your company maintains its value or make installment payments based on revenues.
If your potential buyer is a private equity firm, they may try to purchase your company in full at a discounted price and flip the business in a few years for a profit.
If your potential buyer is a family office, or a firm that invests on behalf of a wealthy family, they may have goals and structure considerations consistent with either individual investor or the private equity firm.
Tax Considerations
While receiving an upfront cash offer is attractive, receiving a large sum of money all in one year can put you in a position to pay a much higher amount of taxes than if you spread the payments over multiple years. As a small business owner, you may also be eligible to exclude 100% of your gains from taxes if you can wait five years to collect your funds through a qualified small business stock exclusion in the tax code.
Conclusion
Selling a small business is a multifaceted process that requires careful planning and strategic decision-making. By preparing your business, maximizing its value, and hiring the appropriate professionals, you can ensure a smooth transition and achieve the best possible outcome. Remember to consider your personal and financial goals when determining the sale structure and appropriate buyer, and consult with a tax planner to navigate the tax implications effectively. With the right approach and professional support, you can effectively achieve your personal and financial goals.
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