Tax Planning Has a Huge Impact on Your Net Proceeds When Selling Your Business
Effective tax planning is the number one way you can increase the amount of money you net when you sell your business. Author Tim Fries at The Tokenist has written an excellent article on what tax issues business owners need to consider before they sell their business. His article, “What Tax Structure Should You Use When Selling Your Business?” explores many aspects of a topic that most business owners fail to investigate before they decide to sell.
As Fries astutely points out, the taxes you are responsible for paying when you sell your business can be complex and are usually a big unknown for business owners who have never sold a business before. Your tax structure can have a big impact on how much money you receive at the closing of your deal, so it’s important to get good advice from a tax advisor early on. A little bit of tax planning ahead of time can save you a lot of money in the long run.
Fries points out that taxes and selling a business are no small matter. It is possible that up to 50% of the proceeds you receive from the sale of your business can go to pay taxes. Don’t worry if you are learning this for the first time and feel more than a little shocked. However, this fact does a good job of illuminating the importance of setting up the right tax structure for your business. While you probably won’t be able to avoid paying altogether, you can prevent paying more taxes than are necessary.
There are a lot of variables that go into how much you will owe in taxes. Let’s take a look at some of the factors that impact your tax liability.
- Will the sale be structured so you receive ordinary income tax treatment or will the sale receive capital gains treatment?
- Is your business an LLC, a sole proprietorship, a partnership or are you operating as a corporation?
- What portion of the sale price is being allocated to tangible assets versus intangible assets like goodwill?
- What is your tax basis in your business?
- How much depreciation have you taken and how much of it was done on an accelerated basis?
- How will the purchase price likely be paid? In installments over time, or in cash at closing?
- Will the deal be structured as a stock purchase or an asset purchase?
- Do you know that your transaction costs are likely to be? These will be added to your tax basis and reduce the overall capital gains taxes you will need to pay.
Selling a business is obviously complicated. Working with an experienced business broker can help you navigate the complexities of selling your business and getting top dollar for that business when you decide to sell, but getting advice from a tax advisor will help you ensure you keep as much of the proceeds of the sale when you ultimately decide to sell.