Let’s make sure that everyone is starting on the same page here when it comes to selling your business.  It is not the business valuation or sales price that you should be concerned about when it comes to exiting your business.  It is the actual, after-tax CASH, in your hand and let’s go play, money.  Straight and clear to the point here, stop worrying about how much your Company is worth and start looking at how to maximize your take home pay. 

Now there is not much less exciting to an entrepreneur than discussing taxes so I will try to keep it at a level you understand.  I understand that you don’t want to pay for any advice or taxes but you are going to do one or the other so just suck it up and take it.  In all honesty I think the word taxes make my stomach more upset than even the word audit, but it’s close.  

Understanding that the devil is in the details and taxes have alot of details to understand.  Let’s just agree that 99% of the general public doesn’t want to pay any more in taxes than required and the government theory is the more you make, the more you pay.  In a large transaction like selling your business, there are most likely taxes that will be owed.  Maybe now, maybe later, but you will pay your share of taxes on any gains you make in the sale.  The goal is to minimize those taxes, legally, of course.

On a side note, I think the reason I don’t like taxes is that I think the IRS is a silent partner in my company and only participates if we make money.  They are not there during the stressful decision making, the risks or the debt, only if I make money.  Their hand is in my wallet when I make a buck but isn’t willing to put money in when I lose it.  I feel like I always have a hand in my wallet when I go put money in but then no one is around when I have to take it out.  In my mind that is not a very good partner and yet I can’t leave them either.  Ugh!!

Ok, back personal diatribe on taxes and into the sales price and taxes discussion.  What you are really trying to do is maximize your take home pay and thereare two main pieces that affect the cash in your pocket when selling the business. The first is what you are selling and the other is the terms of the deal. 

What I mean by what you are selling is if you are selling the assets or the stock of the Company.  Now I’m going to assume that you are not a C Corp, since most business are not and if you are, then you would need to read up on the differnces between these types of sales.  Selling the assets can include not only the physical assets (desks, equipment, inventory, etc) but also divisions, client lists, product lines, etc.  These items are generally taxed at the difference between the cost on the books (some might have been fully depreciated) and the sales price.  If there is no actual recorded cost, like a client list, then the complete sales price is taxed at your personal Federal and State rates.  The minimize the taxes then the goal would be to assign a cost to whatever you are selling.  There are numerous ways to do this each situation and State is different.  My advise is to talk to a professional CPA for your situation.

In regards to the terms of the deal we are talking about the timing and payment plan, values on each item purchased.  One typical way to effect the taxes is to make the sale an installment sales and get paid over time instead of a lump sum payment.  In an installment sale the profits can be allocated over the number of years the debt is paid back.  One benefit of this is your income will be lower the next few years after the sale since you are no longer working and making wages.  This allocates the income over numerous years and thus lowering the tax bracket you are paying at.  Another tax savings used is to lower the sales price and work under a continuation agreement.  This allows the buyer to deduct your consulting fees as a direct expense and you a monthly income to allocate business expenses that might carry over the next few years.    These are both just a few examples of how to save money on taxes and net more cash.

However you go about this analysis having a professional that understands the tax ramifications should be brought in very early in the negotiations.  Too many times they are brought in at the end and kill the deal because the seller find out what they are left with.  They can advise both sides of the deal the best way to maximize the after-tax dollars.  My advice is to not be penny wise and pound foolish.  Invest some money in professional advice since you will either pay it in taxes or less in advice so I would rather go with the advice.

This entry was posted on Friday, October 23rd, 2009 at 3:01 pm and is filed under Strategic Advisors, Sell Your Business, Professional Advice, Exit and Answers, Buy a Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.