While taxes are inevitable, the AMOUNT and TIMING of taxes can vary considerably.  The advice of a tax professional is quite valuable when planning the sale of your business.

Outlined below are potential strategies and considerations about tax planning when selling your business. For our purposes, we will use the viewpoint of an Asset sale (as opposed to a stock sale).  A simple example.  Let’s say you acquire an asset for $1,000 and sell it for $1,500 after one year.  You’ve recognized a gain of $500. Pretty simple concept, correct?  Now the sale of a business usually is not a sale of one asset. Instead, most or all the assets of the business are sold (a few may be retained).  How does the sale of business assets differ from the simple example?

When a group of assets is sold, each asset needs to be classified into tax “categories” to determine how they will be taxed.  The main categories on a company’s balance sheet are:

  1. Property held for sale to customers, such as inventory
  2. Operating assets such as Accounts Receivable and Securities
  3. Capital Asset (Assets held for over one year) such as land
  4. Depreciable property used in the business, such as machines
  5. Real property used in the business, such as buildings

These 5 categories will ultimately be allocated to the following tax categories:

  • Capital gains (the lowest rate)
  • Depreciation recapture
  • Ordinary Income (usually the highest rate)

The objective of the seller is to allocate as much of the purchase price as possible to assets that can be classified to capital gains.  Capital gains rates are currently 0%, 15% or 20%.   Depreciation recapture rates are 25% while ordinary income rates range from 0% to 37%.

Some assets, such as Receivables have a clear-cut value, based on billing to customers.  However, other assets may require judgment, possibly an appraiser to determine value.  The allocation of assets can result in significant savings and should be carefully considered when conducting an asset purchase when selling your business.

You’ve made the decision. You will be running your own business in the future! As you explore the initial startup steps necessary to build your business, you realize the long road ahead. Still, you are determined to take the plunge.

After taking a deep breath, you also realize the initial decision can either propel you into immediate operations or result in a startup period which entails a longer runway to profitability. You can build your business from “green street” as a startup, or you can buy an existing business. So, you break out your scale, and decide to weight the plus and minus of each approach. You discover the following considerations to evaluate.

Consideration Buy a Business Start Up a Business
1. Sales Immediate Sales Build Sales
2. Income Possible Profits Day One Ramp Up Period
3. Products / Brand Immediate Branding Ramp Up Period
4. New Market Niches Easier to Enter Time Lag Before Entry
5. Network of Contacts Established Must Build
6. Grow the Business Focus on Business Paperwork Focus
7. Reinvest Earnings Possible Not Possible Yet
8. Employees Trained and In Place Must Train and Find
9. Risk Track Record = Lower Risk No Record = Higher Risk
10. Raising Capital Easier – Established More Difficult
11. Cost Initial Cost Higher Can Operate Cheaper

Your job is to determine the optimal use of your time, and clearly understand the constraints that a start up may impose. Do you have all of the talents needed to grow the business? Do you have the operating capital necessary after the initial purchase? Carefully evaluating the considerations above will usually result in a path that is clear for your particular scenario.

Contact us if you are ready to further discuss purchasing an existing business.

The initial 90-day period for a new business listing is an important time for both the owners and intermediaries. This is not a time to relax and wait for an offer from a buyer. It is a time to tighten things up with this business and ensure the numbers are looking strong for those who are likely to submit an offer. Because potential buyers are generally more attracted to opportunities when there is a current growth trend in earnings and or revenues, we as intermediaries encourage the owners to ensure the company looks as enticing as possible on the inside and out. This makes it much easier to show potential buyers they will receive a return on their investment and gives the seller a chance at making as much on the sale of their business as possible.

Along with the expectation of keeping strong numbers on the books, our clients can also expect to start becoming involved in certain aspects of the sales process. This typically comes in the form of holding meetings with potential buyers in order to answer any questions they may have regarding the business. However, before those meetings are set up, the intermediary will put all potential buyers through a vetting process in order to ensure our client’s time is not wasted on meeting with insincere inquirers. PBB’s intermediaries understand our clients are busy and do not have time to sort the hard buyers from the soft browsers while continuously marketing to those who possess real interest. PBB’s team of intermediaries also monitor market activity and buyer expectations in order to ensure there is a natural fit between all involved parties, which takes a large amount of worry away from our client and puts them at ease.

Another final factor one should consider during the first 90 days is there will be times the selling price may need to be adjusted, which depends quite a bit on the initial 30-45 days activity for each specific opportunity. Even businesses that are considered to be priced “right”, in a traditional sense, there may need to be an adjustment of the asking price to align with the current market environment. Many factors can affect that environment, but the most critical aspect to maintain control is to manage expectations with both the market and sellers. Premier Business Brokers is dedicated to ensuring our clients are protected and well-informed in the process of selling their respective businesses. If there is ever a question that arises, our clients can be assured our intermediaries will be able to answer their inquiries and mitigate any concerns in order to provide a smooth and painless selling process. If you’re interested in selling/buying a business or simply have questions about our services, get in touch with us at www.premierbb.com

When it comes to buying and selling a business there are a handful of things one will want access to during the process. One of the most important on the list is having the right broker working on the deal. Why would one want to use a broker instead of simply handling the transaction themselves? According to Jared Ribley, “The right broker will be able to guide the whole process seamlessly and keep all parties comfortable.” Ribley also believes using a business broker can help expedite the business sale process in a professional manner and that selling a business is more complex than selling real estate. “There are far more nuances to consider” according to Ribley.  A broker has been involved in several business acquisition deals and their expertise comes from experienced repetition. So why use a broker?

There are plenty of things a business seller/buyer may end up overlooking, which can create heavy problems down the road. Some of the main issues a seller/buyer may come across when not using a broker are lack of confidentiality, legal navigation and accurate valuation expectations. When it comes to selling a business, confidentiality is important. Keeping the sale confidential helps the business operate without unexpected issues that may arise from word getting out about the company being for sale. Some of the larger issues that may arise due to lack of confidentiality can be employee unrest and lack of confidence from current and future customers, which can lead to the loss of a sale. Legal navigation is another big reason why one will want to use a broker for the sale of their business. Brokers understand what is and isn’t legal during a transaction and can not only keep one out of trouble, but also help get the best deal possible. Accurate valuation expectations and successful negations that ultimately lead to a good sale are the other two main things to consider when it comes to why one should use a broker.

As we can see, making attempts toward navigating through a deal by oneself can cause a lot of confusion and other issues that may result in the loss of a sale. Allowing professionals, such as the intermediaries at Premier Business Brokers, will help maximize a deal and give the business owner a sense of empowerment knowing they are being backed by true professionals who understand the business of selling business. For more information about Premier Business Brokers and our intermediaries, visit premierbb.com and get in touch with your questions and concerns regarding the sale of a business.