Make sure you know how the sale of your business will be taxed.
A whopping 30% to 60% of the proceeds from the sale of your business could be consumed by taxes and fees without proper planning! Most owners are thinking about how much they’re going to gross from the sale of their businesses – not how much it is going to cost them, as we talked about recently in our article: How much will it cost to sell my business?
Unfortunately, not crunching the numbers ahead of time and taking the time to plan can cost you more than you may realize…as in the case of this business owner.
The Situation
Brian owned the best delis in town. In fact, people came from all around for his delicious sandwiches and salads. After 35 years of pouring everything into his business, Brian was ready to slow down and take it easy. He had a great staff, reputation, and following. The market was good and the time was right. He and his wife decided now was the time to sell. Brian had made a great living, the business had always provided for them, and he was ready to cash in and enjoy retirement.
It wasn’t long after the business went on the market that their broker brought them a very qualified buyer. It wasn’t the price Brian had hoped to get but then again he had always made it a priority to keep profits low in order to minimize taxes, so he wasn’t totally surprised at the final negotiated price.
The closing date was set and Brian and his wife were planning their first REAL vacation in a very long time! Brian asked his CPA to work through all of the numbers and let him know what the net from the transaction would be so he could inform his wealth manager and they could start making plans.
Brian’s CPA called him to come in and go over the numbers. He left his CPA’s office in shock. Brian had never considered how much he would pay in taxes and fees on his sale. His net would only be the equivalent of what he normally would receive in salary, profits, and perks from the business for three years.
How could he tell his wife they could not afford to sell the business?
The Outcomes:
- Brian had run the business to minimize profits and this hurt his selling price.
- Brian was not aware of how much he would be paying in taxes and fees on the sale and how little he would actually net.
- Brian was a C Corp so he had two layers of taxation.
- Brian could not afford to sell the business. He had saved very little outside of the business and was dependent on the sale for his retirement.
- Brian could not retire when he was planning to.
Lessons Learned:
- If Brian had known how the sales process works he could have run his business in a manner to demonstrate the true profitability and increase his selling price.
- If Brian had known in advance how much he would likely pay in taxes and fees, he could have found ways to reduce the tax burden by working with experienced advisors.
- Brian should have been saving outside of the business to reduce his dependence on the sale and diversify his risk.
- With more planning, Brian and his wife could have retired when they wanted to instead of working for more years.
Don’t let this happen to you!
Join the hundreds of business owners who have successfully exited their businesses by following our proven exit planning process.
