What are your tax planning options when selling your business?
You are a business owner considering the sale of your business. You’ve been doing this for many years, but it’s time to retire, as there are health reasons for selling. Alternatively, you’re burnt out. Perhaps it’s time to sell the business and move to a bigger and better idea than yours.
Therefore, the first step is to consider selling your business. What should step two be?
Do you have a business and know its Fair Market Value?
Step two is to ensure you have something better than what you’re currently doing. If you’re burnt out and thinking of selling, then you go to all the trouble to find a Buyer for the business and get their offer. Then you suddenly realize you’d sooner continue what you’re doing rather than sit on a beach or play golf four days a week or whatever. Step two is to ensure you’re excited about what you’re moving to.
What’s the value of my business? No really.
If selling seems the best option, step three is to get a business valuation from an independent third party. I can’t tell you how many business owners call me and explain why they think their business is worth a certain amount of money. After asking a series of questions, I had the problem of bursting their bubble. Therefore, if you are serious about selling, consider obtaining a third-party valuation. The valuation can be an opinion of value from a business broker, accountant, or other professional. This does not require an in-depth appraisal, such as when the matter may be taken to court, for example, in a divorce or partnership dispute.
But do I have to pay taxes if the business sells?
The fourth step is to consult with your tax agent or hire a professional who can inform you about the amount you will retain after the Buyer pays your negotiated purchase price. Just because the Buyer offers you $1,000,000 for your business doesn’t mean that’s what you get to keep. There is an issue called taxes that needs to be addressed, which can become complicated.
There are many ways it can get complicated. The complication starts with the legal entity of the business. Tax write-offs and tax minimization are different for a Sole Proprietor, an LLC, or an S corporation. They are exceptionally distinct for a C corporation.
Complication two arises when the Buyer wants to maximize the tax benefits from his perspective, which often has a negative consequence for the Seller. This complication must be resolved before the transaction can be closed through the purchase price allocation process.
What is the Purchase Price Allocation?
The Purchase Price Allocation comes into play when the total purchase price is broken down into items such as inventory, goodwill, fixtures, furniture and equipment, covenant not to compete, training, and other categories available. These categories vary according to the business being sold.
For the benefit of both the Buyer and the Seller, it is essential to recognize that the deal can fall over if an agreement is not reached on the Purchase Price Allocation, as there are tax consequences to each party.
Furthermore, this piece of negotiation can arise after the first set of talks for the purchase price and terms of the deal. If the purchase price and terms have been protracted and subject to tough negotiations, working through the Purchase Price Allocation can open up a new source of tension. The key point is that each party must be willing to give on the purchase price allocation. If one party refuses to budge, the transaction is likely to fail.
Here is more information about the tax impact of selling a business.
If you’d like more information about transitioning out of your business, feel free to contact me for a quick consultation. We’ll discuss your particular business and what’s important to you, and make a plan for the first few steps.
