Impact of Tax When Selling a Business

What is the impact of tax when selling a business? Most small business owners spend a lot of time wrestling with the decision about when they will put their business on the market and try to sell it. There is no question that selling a business is an important decision for its owner as it touches many aspects of their life. These aspects of their life include their financial security, their perception of how successful the business has been or alternatively, has the owner taken the business as far as they can take it. However, probably the most important aspect of all is what the owner wishes to do with their future and whether or not they see themselves owning and operating the business.

All of the above and many more reasons take time to consider arriving at the right answers. If the owner no longer sees themselves owning and operating the business and wish to sell, there is an important need to consider the tax implications if they sell the business. The tax implications happen at two levels. The first level is the tax consequences preparing the business for sale. The second level is the impact on taxes when the business moves from the current owner to the buyer. If you are considering selling your business, here are some tax consequences to consider as you contemplate whether or not you will sell the business.

Understand the differences between a Stock sale and an Asset sale. Buyers generally prefer an Asset sale as it eliminates legal liabilities and allows the buyer to start depreciating assets all over again.

Consider maximizing the amount of charitable contributions to closely held business interests

Consider receiving some of the purchase price of the business in installments such as through payment of a salary, a management agreement or a consulting agreement, This allows the seller of the business to receive income when they stop working in the business and therefore no income tax for wages or salaries.

The tax benefits of an installment sale. An installment sale allows the seller to be paid some of the proceeds from the sale of the business to later years thereby spreading out or deferring to future years the tax liability the income would generate.

An additional strategy with the last suggestion is to increase the rate of interest the seller is paid on the installment sale once again deferring to future years the tax liability.

Understand that the value the business sells for revolves around the discretionary earnings of the business so all cash that flows through the business is reported, non business discretionary items are no longer run through the business and any unusual one off occurrences are clearly documented so a buyer can see they are not a normal part of the way the business operates. For example, the business may have a settlement with an employee that involves a one-time payment or the owner may be going through a divorce and paying the attorney fees through the business. These one-off events reduce the profitability of the business but the appraiser should not consider these when they appraise the business.

The tax treatment for different types of legal entities is not the same. A sole proprietor, LLC or partnership will have much different tax outcomes to a corporation. The tax treatment may be entirely different for an S Corporation than a C Corporation. If the owner of the business wishes to maximize their tax position it requires an appropriate amount of planning and guidance.

Because the tax impact from selling or buying a business is complex and can create tension in the transaction, a company that specializes in business exit tax strategies to help both buyers and sellers is Walker Advisory Services in Texas. Walker Advisory Services can work directly with you to offer their tax planning suggestions or in conjunction with your CPA or tax agent. Their specialization of tax planning strategies exposes them to this difficult area of tax law and uniquely positions them to support the nuances that relate to the selling of a business or buying of a business.

Andrew is a 5-time business owner that helps entrepreneurs exit or enter business ownership. His services include helping owners sell and/or buyers purchase an existing business or consult on purchasing a franchise. He also provides certified machinery and equipment appraisals and business valuations.

Andrew currently holds the Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA), the highest credential awarded by the IBBA and the Certified Business Broker (CBB) designation from the California Association of Business Brokers. He also holds a Brokers License with the California Department of Real Estate, is a member of the Sacramento Metro Chamber of Commerce and the Chair of the Sacramento Chapter of the California Association of Business Brokers.

Home Business: Your Chance To Work In Your Jammies!

Although most people do have the aptitude and the ability to work, not everyone is cut out for taking orders and climbing out of bed at the crack of dawn every morning. This is just one of the many reasons why millions of people attempt to start home businesses every year. Read up on these home business tips.

Find out if local groups, such as a church or business association, offer group insurance and, if they do, join up! It's a great way to save money on your insurance while getting peace of mind from the fact that you're fully covered in case something happens to you or your family.

Stay far, far away from people that hand out negativity. Every negative person has his reasons for being that way, but it's his problem, not yours. Don't let these people steal your dreams, motivation or confidence away. Realize that negative people are that way with everyone they encounter; don't take it personally, just move on and find more people that support your efforts.

In order to be successful in terms of having a home business, it is very important that you like to do what you are doing. With that said, it is a common thing to choose a product or company that matches your interests. Like any other thing, choosing something you like will make you do the job better.

Arrange to have a toll free 800 number associated with your home business. Taking this step allows you to keep your personal information private. If your business is successful, having an 800 number also leaves your home number free to take calls from your friends and family, who might have difficulty getting through otherwise.

Be prepared when meeting with a loan officer. When applying for a home business loan, make sure you are well-prepared. Have a solid business plan, and a long-term cash projection. Talk about your home business with confidence, and be prepared to honestly answer any questions. Most importantly, don't lie about your loan application.

Don't blindly copy the advice of gurus. What worked for them may not work for you. Make your decisions from first principal and learn from experience. Experience is more important than anything someone who's apparently wiser than you can say. Learning firsthand, and often through a system of trial and error, gives you true know-how.

Establish a daily routine when running your home business to keep on track and motivated. One of the benefits of a home business is the flexibility it gives you in scheduling. However, creating a daily routine with time allocated to running your business increases the likelihood your business will be successful. Otherwise, it is too easy to get distracted by other demands and lose focus on your business.

Develop a description for your home business that can explain what it is that you do in less than three sentences. If you have to spend a good bit of time explaining what it is that you do, you may not have the plan that you need to have to succeed.

Determine your goals. Find out what you are most interested in, and base your goals on that. If your goals match the type of business, you are entering into, you are much more likely to be successful. If they do not, you may need to choose a different type of business to get involved in.

Expectations can be low for home businesses, so it is up to you to make sure that you overdeliver on every product or service that you sell. Think of bonuses and extra ways to show appreciation for the person who is paying you. They will remember and use you, the next time they need to order something. Better yet, they may recommend you to friends.

Before you begin a home business, you need to develop a business plan that maps out the course of your business, including your financial expectations. You should be willing to spend some time writing this out because if you need investment partners, they will expect you to have adequately researched your business and have the ability to present your ideas well.

To get more business from the Internet, the domain name that you choose is important. You want to pick a name that has meaning. It will help others remember it more, and your customer's won't have to do a lot of searching on the Internet to find your business site.

Checks

Go to the bank and open an account for your business. Do not use your personal bank account. This will help you keep track of your expenses and income. Your customers will be able to write checks or wire money to a business account, which helps them trust you and your business.

When you first start a home business it's a great idea to talk to someone at your bank who is knowledgeable about business accounting and finances. They will be able to help you start a business bank account, get cheap personal checks with your business name on it, and even apply for a business line of credit or credit card.

Join local charity drives to get your company's name out to the masses. Companies can bring over-sized checks, pledge a few thousand dollars, and get massive media coverage for their business. People will notice charitable companies.

Hire your family members for your business. They are around anyways so they can help you easily. Write up a job description for them and write them a company check at each pay period. This way you can save money and you can also deduct their checks as business expenses.

If you'd rather call the shots and make all the rules, then these tips might just help you to create a successful and long-lasting home business. Now that you have learned these tips; however, the onus is on you to apply them where necessary in order to make them work. If you can do that, you can be successful.

Selling Your Business: Important Issues for Sellers to Know

If you want to sell your business, or if you are at least thinking about it, you will have a lot of important things to consider. What is my asking price? How do I market to prospects? Do I need professional assistance? Without possibly covering all of the matters a seller must contemplate, this article discusses some of the basic issues any seller of a small business in Florida (or elsewhere) should consider prior to taking it to the market. The following are some key questions that you, as a seller, should ask yourself:

Who is the legal owner of my business? It's almost a silly question, but let us not overlook it. Your business almost certainly has assets. When we say assets, we are talking about equipment, inventory, trade fixtures, customer-client base, accounts receivables, etc: all of the things which you use to run your enterprise. Most small businesses are sole proprietorships, S Corporations, or LLC's. If you are operating as a sole proprietorship, then you own the assets in your individual capacity. If you run your enterprise as an S Corporation or LLC, the entity is the owner of the assets and so the entity itself, not you individually, would constitute the "seller" of the business.

How will my business be sold? Selling can be accomplished in one of two ways: The assets can be sold and transferred from the selling party to the acquiring party, i.e., the buyer. In simple terms, this is called an "asset sale". Alternatively, the buyer can purchase the stock or ownership interest of the existing business from the seller. In the second case, the entity (i.e., corporation or LLC) which owns the assets will continue to exist, but will have a new owner. In simple terms, this is called a "stock sale". Most small businesses are purchased as an asset sale, not as a stock sale. In other words, the buyer/new owner will purchase the existing assets of the seller's business and then run it under a different and separate entity.

What should be my asking price? In order to answer this question, you should attempt to first figure out the value of your business. A method commonly used to value small business is the discretionary earnings method. This method requires evaluating the seller's Profit and Loss Statement, by locating items or expenses which are not necessary to the enterprise, and then recasting the Statement to ascertain the "real" cash flow or earnings of the business. The recasting process involves adjusting or "adding back" the seller's expenses which are not crucial to the business, or which the buyer, as the new owner, would not likely incur himself. Once this recasting process is done, the "value" is then determined by multiplying the seller's net earnings by a multiplier. This is not an exact science, but the method at least helps the seller get an idea of the price range of his business.

As an illustration, if you determine, after recasting the seller's Profit and Loss Statement, that the seller's discretionary cash flow or earnings is $100,000, the next step is to multiply that number by a multiplier. Each industry will likely have its own multiplier, but a commonly used benchmark multiplier is around 2.0. So, if you multiplied 2.0 times the seller's reconstructed net earnings, you will get $200,000. Thus, the rough value of the hypothetical business would be $200,000. You should note: the discretionary earnings method is by no means the only way to determine the value of a small business. There are other methodologies. If you think you need professional assistance in valuing your business, you should seek the assistance of an accountant or a business broker.

How do I market the sale of my enterprise? You will obviously need to market to prospective buyers. Marketing can be accomplished through a variety of avenues and media. You can start with people who work in your type of business. A competitor, for example, might be interested in buying. You can also try traditional print advertising in your local newspaper. If you are in a recognized industry, there may also be trade or industry journals in which you can advertise the sale of your business. Another option is to obtain professional assistance of a business broker. Typically, the business broker would "list" it for sale on the internet (and through other outlets) just like a real estate broker would list a home for sale. A business broker typically charges a 10% commission for his or her services. If you're interested in seeking the assistance of a business broker, you should find out about their services, what type of businesses they have sold, what is their commission rate, and how they will go about the marketing process. You should also ask if the broker is a member of the Business Brokers of Florida. While no reputable business broker can honestly guarantee results, he or she can be an invaluable source of assistance.