When selling a business, remember the Beatles song, because the Taxman cometh. Sellers need to identify the tax implications of the transaction. Even though they won’t know all of the details of an eventual deal, they need to have a conversation with their CPA about what the taxes will look like on a hypothetical transaction and start to plan for how the ultimate transaction would be best structured to minimize the taxes due – unless, of course, the seller is someone like Warren Buffett who reportedly claims that he would like his taxes raised so he could pay more. Many owners assume that every financial aspect of the transaction will have a capital gains rate applied to it. But that’s just not the case. A lot of owners are surprised by how much of the proceeds is considered ordinary income – and is taxed at that higher rate. With some planning, they can often structure their compensation in a way that will reduce the tax bite at sale. Last week’s post included a discussion about the differences pertaining to taxes in the structure of the transaction from the buyer’s versus the seller’s standpoint. It’s important to anticipate possible buyer reluctance to finalizing a deal because of how the tax issues are structured. A couple of conversations with the owner’s accountant will likely improve the financial outcome of the seller’s deal.

But Who Cares What They Need? What’s it Worth??

When selling a business, owners must have a reasonable understanding of the value of their business. Owners overestimate the value of their business all the time. All the planning – financial, tax, marketing, etc. – will be for nought if the seller brings the business to market at a price – or expecting an offer – that is unrelated to the business’ actual value. From the seller’s standpoint, a valuation of the business is critical. And most professional business brokers will require one. Stories of such ill-planning and disappointment are legion. Bringing a business to market at a price that will almost guaranty it won’t sell redounds to the detriment of the business broker, as well. Early on, it makes sense to hire the appropriate professional to establish the fair market value.