If you are thinking about selling a business or in the process of selling your business, I am going to give you three powerful questions to ask yourself before finalizing the deal.
My name is Joe Gallegos and I am CPA and Consultant to small and midsize businesses. Since 2012, I’ve worked with small and midsize businesses, helping them transact their businesses and avoid common pitfalls I am doing to talk about here so that you can be sure to avoid them.
Question#1 – Are you going to sell your business as an asset sale or stock sale?
You should ask this question because your after-tax proceeds can be significantly impacted based on how you transact your business. They generally WILL NOT result in the same net cash proceeds to you.
An asset sale is when you allocate the purchase price to your existing assets based on a price allocation. The excess of the purchase price not allocated to your assets will be allocated to goodwill.
A stock sale is more straight forward in that you allocate the sales price to the stock in your business.
Asset sales will typically be taxed at ordinary AND capital gains taxes rates.
Stock sales will only be taxed at the capital gains tax rate.
When you understand the difference, you’ll be able to approach the buyer and negotiate a deal where the buyer adjusts the purchase price the additional amount you will pay in taxes because of the deal structure.
Question#2 – Are you going going to leave your working capital in the business?
Depending on the deal size, a buyer might want you to leave net working capital in the business based on “baseline”.
Smaller deals generally do not comprise leaving working capital in the business.
On the other hand, larger deals can have a working capital baseline required to stay in the business.
Understanding this part is important as you don’t want to leave any excess working capital in the business or working capital that will be taxed, but has not yet been distributed.
Question#3 – Are you going going incur additional taxes related to the sale?
When you sell a business, you might cost yourself additional taxes that you normally would not incur.
It will be a substantial windfall that can create tax exposures that are not normal to your situation.
For example, in Texas an asset sale will result in additional franchise taxes that a stock sale would not otherwise create.
When you understand this part, you can negotiate with the buyer to cover this cost as well.
Remember, you need to be focused on net liquidation proceeds (how much you are walking away with) instead of the purchase price.
I’ve seen many deals where there was a substantial difference between the two because of the reasons I just discussed above and some of the additional reasons I discussed here: Simple Exit Secrets: 5 Simple Steps To Maximizing Proceeds From A Business Sale.
Enjoy and good luck!
ABOUT THE AUTHOR: Joe Gallegos has created tax strategies and operating systems for businesses that have saved taxes, increased cash flow, and profits. As the Managing Partner of Tax an Consulting for JAG + Argueta CPA Firm, Joe has taught hundreds of business owners his step-by-step strategies for creating their own success and obtaining more time and more profits. For more profit creating business tips, tactics and strategies, sign up up for our tips here.