As a business owner, you have always taken the lead role in everything related to your company. This creates a strong emotional bond that can make it hard when it comes time to sell, as you make a number of potentially difficult decisions.
Having a good professional services team around you can take out some of the emotion, in turn giving you unbiased advice that will allow you to realize the full value of your life’s work.
Here are 9 questions you may have as you consider selling your business, planning for succession, or transferring your wealth:
1. When should you sell your business?
The best time to sell your business largely depends on what is best for your personal situation. You should consider your retirement objectives and whether the transaction value can support those plans. Ideally, you would want to sell your business when the market valuation is at its highest point.
2. How is selling a business different during the COVID-19 crisis?
Lenders and buyers are assessing the uncertainty and looking more closely at risk. Lenders and buyers alike are focusing on what is going on in each industry, and how that could change after the pandemic. Keep in mind that lenders are tightening the requirements for funding loans to buyers of businesses. On the seller side, a comprehensive analysis should be conducted to isolate the effect of the pandemic on financial results. This would lead to forward looking projections showing how the business will recover once the vaccine distribution returns the economy to normal conditions.
3. How is the sale of an LLC taxed?
There are two types of business sales. An asset sale is where the owner of the business sells only its assets/operations. The buyer can choose which liabilities to assume, if any, and the buyer receives a “step-up” in the basis of purchased assets — a tax benefit. In a stock sale, the seller sells their shares of the business, including all assets and liabilities. Stock sales are much simpler, but they are less attractive for the buyer because they do not receive a tax benefit step-up and do not get to choose which liabilities and obligations to assume.
In an asset sale, each class of assets is assigned a value. This is considered a “purchase price allocation.” Any amount received over the value of those assets is the gain on the sale. Typically, ordinary income assets such as inventory and accounts receivable are assigned values based on their book or tax value so that there is no ordinary income gain. Sellers want to avoid ordinary income gains because the tax rates on those gains are higher than capital gains rates.
The excess of the purchase price received over the value of all assets is considered goodwill and taxed at capital gains rates.
In a stock sale, the seller is selling their stock in the business and any gain is taxed at capital gains rates.
If your business is a partnership (usually LLCs) or S-corporations (an LLC or Inc.) the gain will flow to you individually as a business owner and be reported on your personal tax return. If your business is a C-Corporation, the company itself will report and pay the tax on gain.
4. Who should you work with in selling your business? Accountant, attorney, broker?
All of the above! It is extremely important to have both your accountant and attorney involved from the beginning. A good business broker can connect you with potential buyers. You will also want your wealth manager or financial adviser involved from the beginningThey can plan how the proceeds will be invested and help you ensure you’re making the best decisions for your financial future.
5. What is a business valuation?
A business valuation is a process in which a professional business evaluator or CPA specializing in business valuation helps assess the fair value of your business. There are various methods for valuing a business, and which one is used for your business will depend on your industry and the reason for the valuation. Generally, no matter which method is used, the CPA or evaluator may analyze the company’s management/capital structure, the market value of assets it owns, and its prospects for future earnings. As the business owner, you will need to provide financial statements, including the income statement and balance sheet.
6. What documents will you need for the process of selling your business? Typically, a buyer will go through what is called “due diligence.” During this process, the buyer will want to see such documents as financial records, customer lists and prior years’ tax returns. Buyers typically focus on the income statement and how the business has been doing over the past 12 months, as well as over the past 3-5 years. Often, a business valuation is provided to demonstrate the value of the business being sold.
7. How should you handle the profits from selling your business? How do you offset capital gains on the sale of a business?
The primary source of income for a business owner normally comes from profit generated by the business. Once a sale is complete, this income will need to be replaced by investment returns generated from the sale proceeds. It is critical that the business owner work with a financial professional to determine the proper investment strategy to fund ongoing income needs and other financial goals. Part of that planning process is to minimize taxes from the transaction by structuring the purchase price allocation to minimize current-year taxes. Additionally, a financial professional would optimize the income stream for efficient tax treatment going forward.
8. How can you best plan for a business transition?
The first step is to work with your accounting professional and financial professional to determine an initial estimate of a valuation and consider whether that sales price would be sufficient to fund your ongoing financial needs. Next, this same coordinated team should work to position the company in the most favorable light to a potential buyer and establish a fair valuation. This would include a thorough analysis of the financials for pro forma adjustments that would highlight the true profitability and value to a new owner. This should all be done before any engagement with potential buyers in the deal process.
9. What are elements of a successful business succession plan?
In general, succession planning should be a part of a strategic plan that’s reviewed on a regular basis. This would include keeping a list of potential suitors and evaluating the strength of the management team for the potential of a management buyout.
Additionally, you should monitor comparable transactions and valuations for similar businesses to determine the best timing for succession. As you work out terms with a buyer, the actual succession process to the new owner should be negotiated by your professional transaction team.
If you’re considering selling your business in the future and want to get a jump on planning for that transition, reach out to us with any questions at info@sbfcpa.com. Dodd with Sagace Wealth can be reached at 727-493-9700 or info@sagacewealth.com.