Thinking of Selling Your Business? 2 Steps to Get the Best Price
Here's what could be the difference between a lucrative outcome and disappointment for business owners now.
Throughout the country, hundreds of thousands of business owners are struggling to cope with the massive impact of the coronavirus shutdown.
Most will soldier on, helped by the government’s relief measures, but a minority will likely decide that it’s time to cash out and sell all or part of the business.
For some, securing outside funding through an equity sale may be the only way to survive. For others, the pandemic and looming recession may have accelerated their timelines for moving on to something else.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Whatever the reason, owners shouldn’t underestimate the importance of having a smart tax strategy in the run-up to a sale. While tax problems rarely sink deals entirely, in my experience they often cause unnecessary headaches and can result in substantially less money in owners’ pockets than would otherwise have been the case.
Step 1: To Get a Better Price, Get Your Taxes in Order
Broadly, there are two key elements of tax planning for a sale. The first is getting your own tax house in order. The second is ensuring that the sale results in the most advantageous tax treatment possible for you.
Too often, owners don’t think seriously about cleaning up their tax situation until negotiations over a sale have already started. By that time, it’s too late to fix much, which puts them at a disadvantage.
From a buyer’s point of view, a business with a messy or opaque tax situation raises an immediate red flag that could encourage them to offer a much lower price. It’s like buying a car without having had the chance to properly inspect the engine. You might still buy it, but you’d want a discount big enough to cover the risk of unseen problems.
That’s why it’s vital for owners to stay on top of their taxes. It’s easy to take shortcuts or get behind on payments and filings, especially in current conditions when it may not seem like a big priority. Maybe you should have been filing income or franchise taxes in more states, owe sales tax, or have foreign subsidiaries with outstanding tax obligations.
These misses are problematic in normal times, but they can become much bigger issues in a sale by undermining a buyer’s confidence in what they’re getting. Owners are often unprepared for detailed questions about their tax situations, even if they’ve been doing everything right, which can lead buyers to assume the worst and factor that into their offer price.
The good news is that sellers don’t necessarily have to fix all their tax issues. Some things can be resolved relatively quickly by catching up on state filings or filing amended returns. But the most important thing is to be able to identify an issue and put clear boundaries around it to reassure buyers that any problems are limited to a particular dollar amount. That may still result in a discount on the sales price, but a much smaller one than if the issue was a black box.
Step 2: Find the Right Type of Sale to Put More Money in Your Pocket
Early preparation is equally important when it comes to optimizing the tax outcome of a sale. If you don’t think about this until you’re in the thick of negotiations, it can be hard and potentially costly to backtrack.
It’s worth taking the time before the sales process begins to research what the most common transaction structures in your industry look like and what will result in the least amount of tax. Certain types of buyers, such as private equity funds, often have common structures that they prefer as well.
In most cases an equity sale will benefit a seller more than selling the business’ underlying assets. That tends to be less advantageous to the buyer, though. In general, the more that sale proceeds are treated as capital gains income rather than ordinary income, the more you’ll get in your pocket because of the lower tax rate. That makes it worthwhile to analyze how the sale can be structured to create more capital gains income.
For example, that could be around how the purchase price is allocated across different assets, or how pools of assets are structured. In general, the buyer won’t care too much about this kind of tweaking as long as they get a stepped-up basis in the asset they can depreciate or amortize.
Even in challenging economic times like we are facing now, buyers are out there snapping up businesses. By following these two principles and having a coherent tax plan in place before a sale, owners can better define their goals and navigate negotiations to achieve the result they want.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Kurt Piwko is a partner at Plante Moran's National Tax Office. The National Tax Office is responsible for tracking and informing staff and clients of current tax developments and responsible for addressing emerging tax issues and other tax technical issues on a consulting basis.
-
A Modern Guide to Money Etiquette: Gifts, Tips, Splitting Bills and More
What is modern money etiquette? The customs for splitting a restaurant check, purchasing a wedding gift, tipping and more have evolved. These guidelines can help.
By Emma Patch Published
-
Want to Give Money to Your Adult Children? 10 Things You Should Know
It’s less taxing to give money to your adult children than you might think. A good plan can help you avoid certain pitfalls — and drama.
By Jeremy Greenfield Published
-
Potential Ripple Effects of Taxing Unrealized Capital Gains
The proposed tax on unrealized gains would be limited to those with a net worth above $100 million, but some see a broad impact on markets and businesses.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
-
Succession Musts: Thoughtful Planning and Frank Discussions
When it comes to passing on the family business, you don't want anyone to be surprised about who will control or inherit the business after the owner's death.
By David Handler, J.D. Published
-
Here's How to Find Your Way Out of the Inherited IRA Maze
To navigate complex rules on inherited IRAs and RMDs, start by breaking down key terms and common scenarios. A clearer picture of your next steps will emerge.
By Evan T. Beach, CFP®, AWMA® Published
-
Should You Move Your 401(k) to an IRA Once You Hit 59½?
Some 401(k)s allow for in-service withdrawals at age 59½, opening up greater investment options. Here are three reasons for taking the plunge.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
When It Comes to Insurance, How Much Risk Can You Take?
Either you or an insurance company takes on the risk of protecting your belongings from loss or damage. Can you afford to self-insure?
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
Five Ways to Minimize a Higher Capital Gains Tax Rate
With Harris’ proposal to raise the capital gains tax rate (which would require congressional approval), investors might want to consider tax-lowering options.
By Michael Aloi, CFP® Published
-
Collar Investing Strategy Can Help Protect Your Nest Egg
Here are some key considerations for using the collar strategy of put options and covered calls to safeguard your wealth in retirement.
By Matt Amberson Published
-
Understand Your ESOP Benefit: The Diversification Option
You can sell your shares back to the company during your employment years, called diversification in ESOP terms. What are the pros and cons?
By Peter Newman, CFA Published