FAQs About Business Exit Planning Considerations
- I would like to sell my business in a few years. What steps should I be taking now to prepare for a successful sale?
- I want to sell my business in two to three years, not today. What can you possibly do for me now?
- How do I know if my company is ready for sale?
- When is the best time to sell my business?
- Do you have other resources that might be helpful as I think about selling my business?
- If I sell my business, what kind of tax implications are there?
- What is involved in preparing a business for sale?
I would like to sell my business in a few years.
What steps should I be taking now to prepare for a successful sale?
One of the best steps to take initially is to gain an understanding as to how businesses are valued as well as the current value of your business. Many of the better business brokers will provide a free evaluation of a business to develop a broker’s opinion value. They can also help you understand how and why businesses are valued the way they are. In addition, they can help you understand the obstacles you face, as well as opportunities to increase the value of the business. We offer no-charge, no-obligation evaluations of businesses.
There is a lot more to be accomplished. We strongly encourage you to read these two articles from the How to Plan and Sell a Business website:The No-Cost Method to Start Business Exit Planning and A 20-Step Business Exit Planning Process.
I want to sell my business in two to three years, not today.
What can you possibly do for me now?
We can provide you with the necessary education needed to prepare your business for a successful sale. We want to create long-term connections with prospective sellers so whenever the timing is appropriate they’ll rely on us to sell their company. Because of our long-term perspective, we offer free evaluations of companies for company owners. The goal of an evaluation is to review the company’s record’s to allow us to provide a broker’s opinion of value including: educating the seller as to how the business value is developed, an approximation of the net proceeds (which isn’t necessarily the selling price of the company), to spot challenges to a successful transaction, and to potentially detect possibilities to improve the valuation of the company. This approach usually provides an extremely illuminating experience for company owners. Frequently we discover issues and opportunities that exist of which they were unaware. To learn more, visit our No Charge, No Obligation Business Evaluation webpage.
How do I know if my company is ready for sale?
It’s probably safe to assume it is not ready for sale! That’s a bold statement but much more often than not, it’s true. In fact, only about 20% of small businesses ever sell. The main reason is a huge percentage of company owners neglect to adequately prepare for the sale of their business. There so many possible hurdles to a successful business sale that advance planning is essential. Obviously, if owners do not identify the obstacles they face, they are unable to conquer them. When owners fail to plan ahead of time, then eventually decide it’s time to sell, it’s likely that the business is simply not saleable, or perhaps can only be sold for a an amount which is significantly less than it could have been had a bit of advanced planning occurred.
Now would be a good time to read this article: Preparing to Sell Your Business – Summary – A 50-Point Action Plan from the How to Plan and Sell a Business website. Chances are good that you have not addressed all 50 items in the article. The earlier you start implementing the recommended measures (quite a few warrant three to five years), the better the probability of selling your company when the business value is at its maximum.
When is the best time to sell my business?
The ideal time to sell is when a confluence of positivity occurs: 1) a helpful macro-economic climate; 2) you are mentally prepared to sell; and 3) the company has had three consecutive years of increasing profitability. Through planning and preparation, you can control (or significantly influence) the latter two by attempting to maximize the business value at all times. By doing so, if you are forced to sell for reasons beyond your control, you are likely to have a salable business whose value has been maximized.
Do you have other resources that might be helpful as I think about selling my business?
Selling your business is often a once-in-a-lifetime event that may be the largest business transaction you will ever participate in. If ever there was a topic worthy of research and self-education, how to plan for the sale of a business should be right at the top of the list. It’s why we created the How to Plan and Sell a Business (HPSB) website. In addition to the 90 articles on HPSB, we also have a Resources page on this website which lists our favorite blogs containing information related to selling a business.
If I sell my business, what kind of tax implications are there?
The answer to this question is very dependent on the type of legal entity (C-Corp, S-Corp, LLC or sole proprietorship).
There is no such thing as a “capital gains tax rate” inside a C-Corporation. So when a C-Corp is acquired via an asset sale, the gain is taxed at C-Corp rates (approximately 35%) and then taxed again when the proceeds are distributed to the shareholders.
In the other types of entities, there is no tax at the corporate level. When a business is acquired via an asset sale, the income (gain) flows through to the individual taxpayer where a portion of the income may qualify for the lower capital gains tax rates. However, depreciation is “recaptured” at ordinary tax rates before the capital gains tax rate becomes effective.
A sale of the shareholders’ stock (or interest) in the entity can result in taxation via the capital gains rate and provide tax-savings. However, for reasons beyond the scope of this answer, most small business sales are structured as asset sale because buyers are very hesitant to acquire businesses via a stock transaction.
The tax laws on business sales are very complex. It’s important to seek advice from a qualified tax professional prior to attempting to sell your business.
What is involved in preparing a business for sale?
Preparing yourself is one of the first steps. You should know what you intend to do on a post-exit basis, after you leave your business. Business owners often experience a difficult emotional transition when they no longer own the business. So, it’s important to be prepared for that eventuality. In addition, you should determine if you can afford to sell the business. To do so, you need to know the value of your business as well as taking an inventory of the non-business assets you own. Is it enough to maintain the lifestyle you envision? Consider reading The No-Cost Method to START Business Exit Planning.
Preparing the business for sale is primarily about identifying and addressing the 66 Obstacles to a Successful Business Sale.
Also, consider reading Preparing to Sell Your Business – Summary – A 50-Point Action Plan.
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