Important Questions to Ask Before Selling a Business – Orange County Register

Baby boomers are selling businesses in record numbers. In fact, 6 out of 10 of his business owners plan to cash in within the next 10 years.

According to a 2020 report by Small Business Administration and Project Equity, companies developing exit plans, the so-called “silver tsunami,” include 2.9 million businesses in the country.

If you own a business, your company’s stock likely accounts for one-third of your non-financial assets, second only to your home, according to the Federal Reserve.

Proceeds from the sale of the business will likely also be a major source of retirement income. So this could be the most important financial negotiation of your life.

But according to valuation research firm IBIS, 98% of business owners don’t understand the value of their company, and few have the plans needed to increase after-tax profits from a sale. .

This makes sense since most people sell an average of 6 cars and 3 homes in their lifetime, but unless you’re a serial entrepreneur, this is probably your first time selling a business.

So how much is your business worth? You can ask multiple brokers and experts for their opinion, but you may get different answers from each. Just like when you appraise a home, the values ​​in your report may or may not be close to the selling price. The sale price and terms are ultimately agreed between you and the purchaser.

Your goal in negotiations is to maximize the selling price and, more importantly, the net (after tax) profit from the sale. So take the time to ask yourself important questions before calling a broker.

First, what are you actually selling?

everything is negotiable

If you are a sole proprietorship or single member LLC (and have filed a Schedule C with your personal tax returns), you are selling company assets. Not all assets are taxed in the same way.

Taxes are distributed across asset classes (i.e. inventory, equipment, customer list, goodwill). Assets held for the short term, such as inventory, are taxed at the higher normal rate. Long-term holdings are taxed at a lower capital gains rate. Part of your negotiation is assigning a selling price to assets taxed at a lower rate.

Selling prices are usually more valuable than assets on the balance sheet. For example, I recently reviewed a broker’s opinion that valued highly profitable companies based solely on the asset value of the depreciation schedule. They undervalued the company by him by $1.5 million. This is because we evaluated it as a liquidation sale rather than a continuing business.

Again, the selling price is based on what the buyer agrees to pay and what you are willing to accept. So the next question is, who are your intended buyers?

Different Buyers Pay Different Amounts

For smaller businesses, especially if they have few or no employees, the buyer probably wants to work independently and is buying the work himself.

They want to know if the small business they’re buying from will provide them with a steady stream of income for years to come. Buyers will likely have to pay the debt incurred to buy the business while earning enough to sustain themselves, putting downward pressure on selling prices.

If your company is large, a buyer may buy your company as an investment. Buyers want the best possible return with the least amount of risk. Investors probably have solid numbers in mind for the purchase price. If the terms are not agreeable, they invest elsewhere.

A middleman (you), your biggest competitor, or one of your customers who wants to eliminate big companies buying small businesses like you, will pay for “synergies.” Synergy occurs when two or more interests are combined to create a new interest with a higher value than the sum of the individual interests. In other words, buying your company is what they really want. Keep options open for selling to synergistic buyers.

Finally, the price your children or key employees pay to take over may have less to do with your company’s market value and more to do with how much they can afford to pay you for the business. Hmm. This type of sale often results in lower prices than synergistic sales but offers more flexibility and tax planning opportunities. It can also be more rewarding for individuals. There is a possibility.

An often overlooked question that can lead to tragic consequences, regardless of who you are selling to, is what are the tax implications if you do?

Taxes can be 50% or more

This question is important because in addition to state taxes (California’s top rate is 13.3%), the taxes you pay the IRS on the sale can range from zero to 40% or more. Without proper planning, more than half of your earnings can be used to pay taxes.

For example, let’s say your company is a C Corporation (file a Form 1120 annually). In that case, if the stock is a Qualifying Small Business Stock (QSBS), you may not have to pay federal tax on the sale. You can exclude 50-100% of profits up to $10 million, depending on when the shares were issued. (Section 1202 of the Internal Revenue Code has some technical requirements, and not all C-Corps are covered.)

If you operate as an S-Corp (File 1120-S is annual) or another type of entity, do not be discouraged. You may be subject to exclusions. If you do not plan to sell within the next five years (QSBS minimum holding requirement), it may be worth considering restructuring your business so that you can continue to take advantage of the gains exclusion. Seek the advice of a CPA or tax advisor to determine how to qualify for this and other tax planning opportunities.

In fact, if you’re considering selling your business now, or in the next few years, seek professional advice you already trust and talk to a succession planning expert.

As best-selling author Alan Lakin said, “Planning is bringing the future into the present so that you can do something about it now.” with higher prices, better terms, and most importantly, maximum after-tax returns.

Michelle C. Herting specializes in tax planning, trust administration and business valuation. She has her three offices in Southern California. Important Questions to Ask Before Selling a Business – Orange County Register

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