Thinking of Selling Your Business? 2 Steps to Get the Best Price

Throughout the country, hundreds of thousands of business owners are struggling to cope with the massive impact of the coronavirus shutdown.

SEE ALSO: To Succeed, Small-Business Owners Need to Put Their Own Finances First

Most will soldier on, helped by the government’s relief measures, but a minority will likely decide that it’s time to cash out and sell all or part of the business.

For some, securing outside funding through an equity sale may be the only way to survive. For others, the pandemic and looming recession may have accelerated their timelines for moving on to something else.

Whatever the reason, owners shouldn’t underestimate the importance of having a smart tax strategy in the run-up to a sale. While tax problems rarely sink deals entirely, in my experience they often cause unnecessary headaches and can result in substantially less money in owners’ pockets than would otherwise have been the case.

Step 1: To Get a Better Price, Get Your Taxes in Order

Broadly, there are two key elements of tax planning for a sale. The first is getting your own tax house in order. The second is ensuring that the sale results in the most advantageous tax treatment possible for you.

Too often, owners don’t think seriously about cleaning up their tax situation until negotiations over a sale have already started. By that time, it’s too late to fix much, which puts them at a disadvantage.

From a buyer’s point of view, a business with a messy or opaque tax situation raises an immediate red flag that could encourage them to offer a much lower price. It’s like buying a car without having had the chance to properly inspect the engine. You might still buy it, but you’d want a discount big enough to cover the risk of unseen problems.

That’s why it’s vital for owners to stay on top of their taxes. It’s easy to take shortcuts or get behind on payments and filings, especially in current conditions when it may not seem like a big priority. Maybe you should have been filing income or franchise taxes in more states, owe sales tax, or have foreign subsidiaries with outstanding tax obligations.

These misses are problematic in normal times, but they can become much bigger issues in a sale by undermining a buyer’s confidence in what they’re getting. Owners are often unprepared for detailed questions about their tax situations, even if they’ve been doing everything right, which can lead buyers to assume the worst and factor that into their offer price.

The good news is that sellers don’t necessarily have to fix all their tax issues. Some things can be resolved relatively quickly by catching up on state filings or filing amended returns. But the most important thing is to be able to identify an issue and put clear boundaries around it to reassure buyers that any problems are limited to a particular dollar amount. That may still result in a discount on the sales price, but a much smaller one than if the issue was a black box.

See Also: Effective Succession Planning Leads to Business Longevity

Step 2: Find the Right Type of Sale to Put More Money in Your Pocket

Early preparation is equally important when it comes to optimizing the tax outcome of a sale. If you don’t think about this until you’re in the thick of negotiations, it can be hard and potentially costly to backtrack.

It’s worth taking the time before the sales process begins to research what the most common transaction structures in your industry look like and what will result in the least amount of tax. Certain types of buyers, such as private equity funds, often have common structures that they prefer as well.

In most cases an equity sale will benefit a seller more than selling the business’ underlying assets. That tends to be less advantageous to the buyer, though. In general, the more that sale proceeds are treated as capital gains income rather than ordinary income, the more you’ll get in your pocket because of the lower tax rate. That makes it worthwhile to analyze how the sale can be structured to create more capital gains income.

For example, that could be around how the purchase price is allocated across different assets, or how pools of assets are structured. In general, the buyer won’t care too much about this kind of tweaking as long as they get a stepped-up basis in the asset they can depreciate or amortize.

Even in challenging economic times like we are facing now, buyers are out there snapping up businesses. By following these two principles and having a coherent tax plan in place before a sale, owners can better define their goals and navigate negotiations to achieve the result they want.

See Also: Retirement Plans for the Entrepreneur

Comments are suppressed in compliance with industry guidelines. Click here to learn more and read more articles from the author.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

EDITOR’S PICKS

Copyright 2020 The Kiplinger Washington Editors

Source Article