For Business Owners, It's a Seller's Market
The tax law overhaul has created a world of possibilities for those business owners thinking about selling … and maybe even those not thinking about it. It pays to be prepared.
There may be no better time than now to put your business on the market. Due to the recent tax law changes, potential acquirers have more capital to invest and more capability to grow. As a seller, the current economic environment provides ample opportunity to entice multiple buyers.
But before you place a For Sale sign on your door, there are serious aspects to consider to ensure the successful transition of ownership, and the best possible outcome for your future.
Common Mistakes Business Owners Make When Selling a Business
Getting all the key factors to fall into place to create a sale is monumental. Building the right team is crucial, but so is understanding the long-term implications of the sale and how they may affect your and your family’s post-sale life days and decades after-the-fact.
Having an unrealistic idea of the business’s value
Just like selling a home or a car, there is a level of emotional attachment owners place on their businesses; after all, you put years of blood, sweat and tears into its creation, therefore it feels like it should hold more value. Unfortunately, it’s not uncommon for owners to think their businesses are worth more than they actually are, and they might balk at the legitimate offers being made. It works the other way, too. Unique tax and business aspects of the business and environment may result in a greater value!
Failing to consider all the tax consequences
Taxes are complicated, and when it comes to selling a business, understanding the tax ramifications is critical to maximizing your after-tax proceeds. Furthermore, due to tax reforms, a sale structured to maximize a buyer’s tax benefits can increase the seller’s after-tax benefits as well. It is imperative to have a financial team in place so you can understand the potential tax liabilities on the business and yourself so as to take the right course of action for the best financial outcome.
Failing to create a plan for life after the sale
Most business owners live on the cash flow from their business and other “benefits” imbedded in the business that may disappear on a sale. Once the business is sold, it is crucial to have not just a financial plan in place, but also a long-term personal life plan that will ensure you have sufficient resources to meet your post-sale goals and needs. As the famous playwright Tennessee Williams says, “You can be young without money, but you can’t be old without it.”
How the Tax Law Impacts Selling Your Business
Even after the tax overhaul, taxes remain complicated. Knowing and understanding the alternatives and options to selling a business can ensure a less substantial tax burden and greater after-tax proceeds. For example, there may be strategies and structures with your intended buyer that include you keeping ownership in your business but becoming less involved. A situation like this has additional risks but could allow you to pull money out over time, which is beneficial to you because it offers you both a stream of income and potential tax advantages as well.
As a seller, timing of gains and after-tax cash flow are critical. One option sellers might consider is to negotiate deferred payments or offer seller-financing, which spreads the proceeds over the span of multiple years. This lets the seller stay in a tax bracket more advantageous to them than if they were to have a large sum of income in a single tax year. Spreading out payments comes with business risks, but it also could provide tax advantages, depending on the size of the transaction and the seller’s individual situation.
If a sale is structured as an asset versus a stock sale, purchase price allocation will be critical to both the seller — due to ordinary tax treatment of recapture taxes — and to the buyer — given accelerated expensing potential. In fact, if the seller is an S corporation, it is often advantageous to take a transaction structured as a stock sale and, for tax purposes, treat it as an asset sale using a special tax 338(h)(10) election. The interplay between ordinary tax rates and capital gain taxes means you will need to be an educated seller with a team who can determine the tax consequences of various sale allocations and structures that best suit your needs.
Preparation: Get Ready, Just in Case
With the tax law changes and drop in tax rates, cash that previously was used to pay taxes can now be used for acquisition and growth. Companies are repatriating cash from overseas and, while some companies may increase dividends, many will look to grow and acquire new businesses.
The time is right for preparation to meet opportunity.
But if you haven’t prepared, there is still time to get your business structured to go to market. After all, the economy ebbs and flows.
If there is one thing the current seller’s market has taught owners, it is the benefits of having a plan in place. Even if you’re not interested in selling, an offer may be presented at some time in the future, even this year, and it’s worth knowing if the offer is low, fair or high.
Preparation also means knowing if your business is actually sellable, based on its after-tax value. You may or may not be propositioned with an offer, but it is imperative to understand if maintaining the business or selling it will continue to provide the resources you need to support your lifestyle, goals and objectives, cost-of-living and other factors in the future.
Getting a team in place allows you to initiate a plan if the want or need arises. Key players include:
- Accounting firm, law firm and financial advisers familiar with your business and goals.
- A mergers and acquisitions adviser to help facilitate the process and guide you through the myriad decisions.
- Specialists who deal with business acquisitions. For instance, your personal tax adviser may not be able to dispense the advice you need to navigate the tax implications of selling your business.
This is an excellent economic environment, where business owners are finding themselves in a hot and profitable seller’s market. Interested buyers have more cash in their coffers, and the tax laws are considerably friendlier to those willing to make the sale. Make sure you’re ready for what lies ahead in 2018 and beyond.
This article is for informational purposes only. It is not intended as investment or tax advice and does not address or account for individual investor/taxpayer circumstances. Please click here for important additional disclosures.
About the Author
Chief Wealth Officer, Telemus
As the chief wealth officer, Andrew Bass is responsible for all strategic financial and life management services of Telemus. He works with high-net-worth members to ensure their financial life plans are designed to achieve realistic goals in both the short and long term.