Tax Efficient Sales of Your Business

So you’ve decided it’s time to turn that lifetime of sweat equity accumulated in your business into cash to support your dreams of traveling around the world, or at least around a few golf courses. You are convinced that it is worth millions, but when that first offer comes, you find that at best, after a broker’s commission and income taxes, you will see a third or more evaporate before you have the chance to find a broker to invest those few remaining bucks.

Here are a few suggestions to consider:

1 – Allocate as much of the sale to the sale of goodwill, not toward non complete agreements or asset sales. That will maximize the portion of the sale to be taxed at capital gains rates.

2 – Consider selling under an installment agreement, meaning that you hold a note for a few years from the buying instead of taking it all in cash. That defers the income tax over the life of the note keeping your annual income down. It also will pay you a rate of interest somewhat higher than you would get at a bank. It might even get you a better price, because they can better afford to pay more over time than in a lump sum. It could save the buyer some closing costs over bank financing.

3 – If you aren’t ready to quit working, and you agree to an asset sale instead of a stock sale, then keep the business alive for a few more years. Then you can continue taking a salary and add a robust retirement plan or other fringe benefits to shelter some of the sales deferred proceeds. In a few years, you can withdrawal from that plan when your taxable income may be lower. This will also work well if you agree to stay on to help the buyer for a few years, by taking that compensation through your old corporate shell instead of as a W-2 from the buyer.

4 – For a larger business, look into selling all or part of your stock to an ESOP (Employee Stock Ownership Agreement). It can make some or all of your sales proceeds tax deferred. It can keep your business going and your employees incentivized to make it succeed in the future. Banks generally love to fund loans to these plans for the purchase, giving you liquidity from the sale or an infusion into the business at a small financial cost, other than some dilution of your ownership share.

Each sale is different and it can be worth some planning before committing totally to that first asset purchase agreement shoved in front of you. A few hours talking to some advisors could yield a large tax savings and/or better proceeds at closing.

By Mark Patrick, CPA & Exit Stage Left Trusted Advisor