Selling a Business? Here's Some Information You Should Review

March 04, 2024

Did you know that 46.4% of all employees in America are employed by small businesses? Even more surprising, less than 20% of small businesses have employees at all. Entrepreneurship is alive and well in this country, despite what the media might lead you to believe. The Millennial generation owns just 7% of small businesses in America. This means that most small businesses are owned by entrepreneurs that are approaching retirement and will be considering a sale of their business in the not-so-distant future.

Approaching the sale of your business is a defining moment for high net-worth entrepreneurs. This guide delves into the intricacies of this process, focusing on direct business sales and the subsequent financial, emotional, and lifestyle implications.

Understanding Liquidity Events and Common Buyers

Liquidity events in mid-sized businesses typically involve direct acquisition, where another company or private equity firm purchases your business. Each buyer type presents unique advantages and disadvantages, such as different levels of operational control and varying financial outcomes.

Choosing the Right Sale Structure for Your Business

A Few options for selling your business include:

  1. Installment Sales: Allows spreading income recognition over time, offering tax benefits but posing default risks.
  2. Earn-Outs: Part of the sale price is contingent on future business performance. While aligning incentives, this can lead to performance metric disputes.
  3. Lump-Sum Sales: Provides immediate liquidity but may result in higher immediate tax liabilities.

Understanding these methods' nuances is key to making an informed decision.

Ensure Proper Tax and Estate Planning

Have you ever considered the Tax and Estate Implications for selling your business? Effective tax and estate planning is crucial. Consider:

  • State Taxes: Don’t forget about state and local taxes. States treat capital gains differently. If you are currently living in a high tax state but plan on moving to a low tax state after selling your business, consider making this change before the sale.
  • Asset Sale vs. Stock Sale: The tax implications can differ significantly based on whether you're selling the assets of the business or the stock (if it's a corporation). In an asset sale, you might face different tax rates on different types of assets (like equipment, inventory, and intangible assets). In a stock sale, it's generally treated as a capital gain or loss. In the case of an Asset Sale, don’t forget about depreciation recapture on any business assets. You will need to pay ordinary income tax on that portion of the gain.
  • Charitable Contributions and Trusts: If you are charitable, consider pairing the business sale with a donation to a donor advised fund or Charitable Remainder Trust. This can reduce taxable income and estate taxes.
  • Tax Diversification in Financial Planning: Incorporate a mix of Roth, pre-tax, and taxable investments to manage taxes and liquidity during the business sale process.
  • Irrevocable Trusts: If the sale of the business has the potential to cause an estate tax issue, consider meeting with a competent estate attorney to discuss irrevocable trust strategies to move the business out of the estate while the business has the potential to qualify for certain valuations discounts.

These strategies can get complicated quickly. Selling a business should be done with the help of qualified professionals to make sure you avoid mistakes. Do you have a CPA or Estate Attorney that can help you navigate these complex issues?

Prepare for Emotional and Lifestyle Adjustments

Selling your business brings profound emotional and lifestyle changes. You might experience a shift in identity and day-to-day purpose. Your family's consumption patterns, and lifestyle may also undergo significant changes, necessitating a thoughtful approach to wealth management. It's crucial to plan for these adjustments to ensure a smooth transition to post-sale life. This is where hiring a comprehensive financial planner can help you better understand what you can and can’t afford.

Seek Enhanced Professional Guidance

The role of each professional in your team is crucial:

  • Financial Planners: They guide investment strategies and help manage the proceeds from the sale. A good financial planner also acts as the quarterback of the sales, passing the ball to the CPA or Attorney when needed. A Financial planner can also help manage the emotional changes that are likely to occur after a liquidity event.
  • CPAs: They focus on optimizing your tax position, ensuring compliance, and managing tax liabilities. A CPA will be able to recommend different sale strategies and other techniques to decrease taxes after the sale.
  • Estate Attorneys: They assist in estate planning, ensuring your wealth is distributed according to your wishes. Estate Attorneys can also help reduce estate tax liability by recommended gifting and trust strategies if necessary.

Collaboration among these professionals is vital for a successful sale, ensuring a holistic approach to your financial, legal, and personal goals. Have you put together a team of professionals that you can trust?

Take the Next Step in Your Business Journey

As you stand at the crossroads of change, remember that the sale of your business is more than just a financial decision; it's a step towards a new chapter in your life. Don't navigate this complex and transformative journey alone. Leverage the expertise of seasoned professionals who can guide you through each stage, ensuring a sale that not only meets your financial goals but also aligns with your personal and emotional well-being.

If you are ready to make informed decisions for your business's future, contact our team of dedicated financial planners, CPAs, and business advisors. Together, we will craft a strategy that maximizes your financial benefits, minimizes tax liabilities, and seamlessly integrates with your life's ambitions and dreams.