When business owners consider their selling options, the financial considerations are usually the focus because most owners believe that the higher the sales price, the better. In fact, most business owners have never stopped to consider how much money they really need to net from their business sale to achieve their financial goals. They have never done the math.
What really matters is the net amount, which is defined as:
- Gross sale price
- Less retained liabilities
- Plus retained assets
- Less all selling expenses
- Legal fees
- Transaction fees
- Less Taxes
- Equals NET proceeds
Two of these items, taxes and transaction fees, can cause the largest reduction in your business sale proceeds. Unfortunately, these items are not usually considered or calculated far enough in advance. Let’s discuss them a bit further.
Typical Tax Treatment on an External Sale
When owners are thinking about selling their businesses, they don’t often realize just how much of their hard-earned wealth will go toward paying taxes. The external sale generally creates the largest tax burden since the owner is selling all of his or her shares at once. Depending upon whether the owner sells stock or business assets, the tax burden will be at ordinary income tax rates, capital gains, or both. In a sale of the assets owned by a C corporation, double taxation occurs, once at the corporate level and again at the personal level. These taxes can seriously erode the net proceeds received by the exiting owner.
The tax bite is often at least 30% and can be as high as 50% or 60% of the sale proceeds. However, there are tax planning techniques that you can employ before the transaction to minimize taxes.
Fees on an External Sale
Other costs that can have a large impact on net proceeds are transaction fees including legal, accounting, due diligence, and brokerage fees, which can be substantial. While an external sale to a synergistic buyer typically provides the highest gross selling price, it may also carry the highest fees.
You don’t need to be a tax or financial expert, but you do need to have a basic understanding of transaction fees and taxes so you can assess different transfer options and understand how much you will “net” from each. If you don’t net enough from the sale, you may be forced to continue to work in some capacity or make significant lifestyle changes in order to have enough money to live the rest of your life. Understanding the fundamentals of each transfer option will enable you to evaluate the components of buyers’ offers much more thoroughly and negotiate accordingly.
Getting Yourself Prepared for an External Sale
You can’t underestimate the complexity, the time needed, and the outside assistance required for a successful outcome of any type of sale. You want to make sure that you’re working with experienced professionals who can give you the best possible advice to make your transition a successful one.
The process of pre-planning can help prepare you for this process. Things like knowing what your business is worth, how potential buyers will see your business, and how much money you need to net are all very important. Business transition planning can empower you as a business owner to prepare yourself and your business for your very own deal of a lifetime whether you decide to transfer your business either internally or externally.