7 ways to prepare your business for sale
For some business owners, succession planning is a complex and delicate matter involving family members and a long, gradual transition out of the company. Others simply sell the business and move on. There are many variations in between, of course, but if you’re leaning toward a business sale, here are seven ways to prepare:
1. Develop or renew your business plan. Identify the challenges and opportunities of your company and explain how and why it’s ready for a sale. Address what distinguishes your business from the competition, and include a viable strategy that speaks to sustainable growth.
2. Ensure you have a solid management team. You should have a management team in place that’s, essentially, a redundancy of you. Your leaders should have the vision and know-how to keep the company moving forward without disruption during and after a sale.
3. Upgrade your technology. Buyers will look much more favorably on a business with up-to-date, reliable and cost-effective IT systems. This may mean investing in upgrades that make your company a “plug and play” proposition for a new owner.
4. Estimate the true value of your business. Obtaining a realistic, carefully calculated business appraisal will lessen the likelihood that you’ll leave money on the table. A professional valuator can calculate a defensible, marketable value estimate.
5. Optimize balance sheet structure. Value can be added by removing nonoperating assets that aren’t part of normal operations, minimizing inventory levels, and evaluating the condition of capital equipment and debt-financing levels.
6. Minimize tax liability. Seek tax advice early in the sale process — before you make any major changes or investments. Recent tax law changes may significantly affect a business owner’s tax position.
7. Assemble all applicable paperwork. Gather and update all account statements and agreements such as contracts, leases, insurance policies, customer/supplier lists and tax filings. Prospective buyers will request these documents as part of their due diligence.
Succession planning should play a role in every business owner’s long-term goals. Selling the business may be the simplest option, though there are many other ways to transition ownership. Please contact our firm for further ideas and information.
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Tax Planning for Business Sales and Purchasing
Whether you're selling or purchasing a business, conscientious tax planning is essential. Whenever a business is transferred, there are tax ramifications for both buyer and seller. These tax ramifications could greatly affect the value of the business sale for both parties -- and it can be even more complicated when partnerships or more complex entities are involved.
The Tax Implications of Selling a Business
When you sell a business, you need to pay taxes on your gains -- the amount of profit that you made off of the sale your business. At its most simplistic, the amount of profit in your business is the amount that you've sold your business for less the amount that you invested into it. But, naturally, the situation can be far more complicated than that. The amount of money you've put into your business is referred to as the tax basis, and it is affected by things such as depreciation, casualty losses, selling expenses, and other factors.
You may be able to sell your business either for a lump sum or a scheduled payment structure, known as an installment sale, both of which will also have tax ramifications -- a lump sum payment will be taxed immediately, whereas scheduled payments will be taxed upon each received payment. Depending on your personal tax situation, scheduled payments may be preferable. But either way, the taxes will need to be paid upon your next tax filing.
There are a few special situations that may apply when selling your business. If your business is being purchased by another business, it may be able to be organized as a tax-free merger. If your business includes long-term capital gains, this will be taxed at a lower rate. Further, assets and stock sales have different tax consequences than an ordinary business sale.
The Tax Implications of Buying a Business
The tax implications for a business buyer tend to be fairly less complex than for a seller -- but there are still some complications that may arise. In general, the purchaser of the business will not be responsible for federal, state, and local taxes that are owed upon the company's sale. This tax liability will be the onus of the seller of the business. However, if the business does owe these taxes, they will likely need to be paid during the escrow process. If they exceed the amount that the seller would make from the sale (and the seller cannot cover the additional funds), the business sale may not continue.
Upon acquiring ownership of the business, the buyer will assume responsibilities regarding taxes for that business. This includes payroll taxes, sales taxes, general excise taxes, and, naturally, income taxes. To ease this transition, the buyer should learn about the company's existing and scheduled tax liabilities, so that they can be paid quickly following the sale.
It's essential to consult with a company who specializes in business accounting and tax services before making the move to either purchase or sell a company. At Dukhon Tax and Accounting, you can get a free tax consultation regarding your purchase or sale. Dukhon Tax and Accounting provides expert income tax prep, tax consultations, and general tax and bookkeeping services for businesses and individuals throughout Allston.