After years of investing your time and energy into building a successful business, you’ve decided it’s time to move onto the next chapter of your life. Whether you are heading into retirement or simply want to focus on a new business venture, having a well thought out transition plan in place can help to maximize your profit, mitigate post-sale taxes, and secure the financial future you desire.
Since selling a business can be a complex endeavor, we’ve put together a checklist to help you make the planning process go as smoothly as possible.
- Decide How You Want to Transition the Business
First and foremost, you’ll have to decide if you want to (1) keep the business within the family, (2) sell to someone within the business, or (3) sell to an outside buyer.
For many business owners, this is usually one of the most difficult of the decisions to be made. It’s also the most personal. There are important factors to consider, such as:
- Do you want to maintain a role in the business after you retire? If so, in what capacity?
- Do you want to sell the whole business or parts of it?
- What does your business need from its next leader to continue to thrive?
- Is there an experienced person within the business who is qualified to take over?
- Is your ideal successor’s vision in line with the needs of the business?
- How will your succession plan affect current employees and/or shareholders?
Each of the above transition plans comes with a unique set of challenges and benefits. Taking care to honestly evaluate each option will increase the likelihood you’ll be satisfied with the outcome.
- Calculate the Value of Your Business
One of the most common mistakes business owners make is miscalculating the value of their business. Of course, any business is only worth what someone is willing to pay for it, but consulting an expert can help you avoid over or underpricing. On the one hand, you won’t want to undervalue and miss out on possible profits; on the other hand, you won’t want to overvalue and have the business on the market for an extended period of time. Potential buyers could get the impression you’re having a hard time selling and leverage it to lower their offer. Overall, studies show that businesses on the market for too long run a very high risk of devaluation, so you’ll want to determine the right asking price before making the sale public.
The most common way to decide upon a price is to obtain a business valuation. These are routinely performed by accountants or business brokers who will assess the value of your business based on your target market, your revenue, expenses, cash flow, and average annual performance relative to that of your competitors.
It’s worth noting, though, that a buyer’s circumstances and intentions for the company may influence the price they are willing to pay at any given time. But, a professional valuation is still the most prudent way to determine a fair and profitable asking price.
- Minimize Tax Burdens
As with any other transaction that turns a profit, taxes will be assessed on the income from the sale. Failing to structure the sale in a tax efficient manner could cost you a large chunk of your profit.
The tax liabilities you incur will vary based upon:
- Your business type (LLC, S-Corp, C-Corp, Partnership, or Sole Proprietorship)
- How you structure the sale
If you run an LLC or Sole Proprietorship, you’ll be taxed capital gains on the profit one time and claim this income on your regular income tax form. If you run a C-Corp, you will pay capital gains taxes twice—once for the corporation and again for each shareholder in the company (divided equally amongst the shareholders). As an S-Corp or Partnership, each individual partner will pay for their portion of the income tax on their personal return and no corporate filing is required.
How you structure the sale will also affect the amount of taxes incurred. Some business owners will sell the company in its entirety in a single transaction, whereas others will sell large shares of their company to multiple buyers over time. Some business owners will even take payments from the new owner’s business revenue until the total selling price has been satisfied. Of course, there are a multitude of options and each garners distinctive tax responsibilities, so it's best to consult your financial advisor and CPA before you make any costly decisions.
- Secure Your Financial Future
Now that you’ve sold your business and accounted for the taxes you’ll owe, it’s time to establish the best plan and investment strategy for this influx of money. Will you maximize your retirement plan contributions, or perhaps set up a family trust? Will you re-invest your earnings in another company, or perhaps bolster your portfolio or fulfill charitable aspirations? Everyone’s re-investment strategy will vary based on their individual financial goals and values. This financial transition can be overwhelming, so taking your time when considering all of your options will help you best serve your long-term goals.
At Northstar, we understand that life’s various transitions take us into unfamiliar territory both financially and emotionally. Our Certified Financial Planner™ professionals, Financial Transitionists®, and a CPAs have completed extensive training to help clients navigate these changes with confidence and ease.
If you are thinking about selling your business, we’d love to discuss how our team can help. Contact us today for a complimentary "Get Acquainted" meeting. We look forward to helping you take this next step in securing your financial future.