Well there’s even more than taxes that you need to know about when it’s time to sell your business. Too often I hear financial planners make presentations about a business owner client and it isn’t very accurate.
First know the value of your business.
This is something I’m always amazed at. When I speak with many financial planners and ask how they value a business as an economic asset I hear that they just take what their business owner clients tell them and run with that.
If you let your financial advisor do that you’re going to likely be in for a very nasty surprise. What you think your business is worth is probably wrong. In fact, most of the time when I ask an owner what their business is worth they’ll tell me it’s worth 3, 4 or even 5 times more than it really is.
You might want your business to be worth tons of money. I hope it is. In reality, your business might be worth somewhere between 3 and 6 times your free cash flow. If you don’t know what that means, you need to find out. In fact, if you click here I’ll spend a few minutes with you explaining how others look at your business.
Make sure you’ve looked at the tax bite of selling before listing your business.
Once you have a realistic view of your business you can now start to think about the exciting world of taxes. When you sell your business you’ll probably end up paying some taxes as capital gains, some taxes as recaptured depreciation and some taxes as ordinary income.
If you are unlucky enough to have a C Corporation your tax bite could be as high as *65 or 70% of your sales price. I’ll be willing to bet that you might think that number is a little extreme. I would agree with you on that. At the same time, you need to really know how much money after taxes you’ll get from the sale of your business.
There’s a lot more for you to be worried about besides taxes.
Too many times I have a financial planning conversation with people like you and find out that you might have thought about taxes and almost always underestimated how much they would be. Rarely do I find a business owner who thinks about other costs and fees.
If you hire an intermediary to sell your business you’ll be paying them a fee. That fee could be as high as 10% of your purchase price. Then, you’ll have attorney fees and accounting fees to go along with the cost of selling your business. I often see fees in a business sale approach 15 to 17% of the sale price.
Now what do you have left to spend?
What needs to be in your financial plan.
I like to get on a soap box and yell about the poor way business owners plan to leave their business. My main reason for this is businesses just don’t often create nearly enough cash for their owners (meaning you) to retire.
Your business is most definitely a really important asset. And like all important assets you should watch it very closely. You also need to know what your business is worth after taxes and fees. If you don’t, you could be in for a very nasty surprise and you don’t want that do you?
What’s your next step?
Here are some things I want you to do:
- Know what types of companies would like to buy your business?
- Know if your business is salable. (most of them aren’t)
- Know how businesses like yours are usually sold.
- Have your accountant prepare your potential tax liability if you sell your business in a normal manner.
- Learn about other methods for selling your business that may yield you more money.
- Find an independent advisor who understands financial planning and the mechanics of selling your business.
This list will help you take control of your process when its time to leave your business. I want you to be prepared and I want you to be happy with your result when its time to leave.
Why don’t you click here and let me know what you think about how ready you are to implement a succession plan? If the answer is not very ready, what’s holding you back from starting your plan today?
*If you’re a C Corporation and you sell your company as an asset sale which is the way most businesses are sold. The seller would first pay taxes at the corporate level and then they would pay taxes again when they distribute the money from the corporation. This is why most small businesses are Subchapter S Corporations.
I sell my company for $1,000,000 as a C Corp. I might pay 40% in taxes for my first round which leaves me with $600,000. I would then pay taxes on the $600,000 when I distribute it from my company. If I do it the right way, I might be able to get capital gains treatment that is around 20% with state taxes. That would mean another $120,000 in taxes which would leave the seller with $480,000 or 48% of their sale price meaning the total taxes paid was $520,000.