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