There comes a time when every business owner considers selling their business. If this is an idea you’ve been toying with, keep in mind that the process of selling your company won’t be a walk in the park.
There are numerous factors to consider before handing over the keys. Think about all the prep work that needs to be done, like finding out the true worth of your business, boosting profits, retaining employees, updating your tech stack, and more.
Once you start the selling process, your focus turns to finding a buyer, structuring the sale, preparing for the tax bill, and planning for the potential large windfall of cash afterward.
To help you navigate this maze, we’re focusing on what owners need to know about structuring the sale of their business.
Clear Cut Signs You’re Ready To Sell
Before you can “pass go” on selling your business, see if the following statements apply to you.
First, you’ve done a business valuation and know the true value of your company—including what you could get for it if you decided to sell today.
Next, you’re focused on scaling the business and making any necessary improvements to help promote growth within the company.
And finally, you have a vision for what your next stage in life will look like, including a purposeful plan for spending your time.
If you can confidently say “yes” to each of the above, then it’s time to move on to the next step.
Two Categories Of Business Sales
There are two primary types of business sales—a stock sale and an asset sale. Each has a distinct set of pros and cons for the seller and buyer.
When a stock sale occurs, someone purchases your shares of the company to obtain ownership. If your business isn’t public, you sell your membership interest instead.
Stock sales tend to be more advantageous for sellers from a tax perspective. For example, if you own a C-corp, the gain acquired from the sale of the business would be taxed at the long-term capital gains rate.
However, the buyer won’t get a step-up in basis when completing a stock sale. This limits the depreciation they can claim—ultimately resulting in a potentially higher tax bill for them.
When you think about selling a business that is heavily concentrated with real estate or other hard assets, an asset sale is likely what comes to mind.
When an asset sale occurs, you sell various assets such as equipment, licenses, inventory, and real estate. You sell these assets at fair market value. In return, any gains are more likely to be taxed at higher ordinary income rates, which are less favorable than long-term capital gains tax rates.
An asset sale tends to favor the buyer, as they receive a step-up in basis, resulting in more tax freedom.
Which Type of Sale Is Better?
When deciding between a stock sale or an asset sale, consider what it is you actually want to sell. Are you looking to sell the entire business? Then a stock sale might provide you with more favorable tax treatment.
But if you’re only interested in selling parts of your company (such as equipment or the building your business is in), then an asset sale might make more sense.
How To Structure Your Sale
Once you determine the appropriate type of business sale, it’s time to set up the structure. There are several ways to do this, including an installment sale or an earnout, for example.
Instead of a one-and-done deal, an installment sale enables you to spread the payments over a set period (sometimes several years).
Structuring the sale this way can help you spread out the tax impact of the sale. The downside is that you don’t have access to the entire lump sum earned by the sale of your business.
With this deal, the seller receives some cash upfront (similar to a downpayment) and additional payments after you sell the business. These payments depend on the business’s continued performance or defined revenue benchmarks.
Most earnout payments are taxable, but they are spread out over time—which can be helpful from a tax-planning perspective. However, this type of sale puts more risk on the seller since it’s dependent on the company’s financial performance. If your company doesn’t meet its targets, you won’t get the full amount of earnout payments.
What Makes a “Good” Deal?
However you choose to structure the sale of your business, it’s important to find a qualified buyer first. This can take time, but don’t rush the process. If you want to sell to a family member or internal staff member, it’ll likely take less time than searching for a buyer outside of the company.
Once you choose a qualified buyer, work with your legal team, CPA, and financial professional to understand the full terms and impact of the sale. You’ll want to get an idea of how much you’ll receive, as this will likely play a significant role in your retirement income plan.
If you’re starting to daydream about selling your business, it’s never too early to start formulating a plan. Reach out and let us know where you’re at in the selling process, and we can help prepare you and your business for the next steps.
Craig Toberman is the Founder of Toberman Wealth – a fee-only financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.
Craig received a Bachelor of Science (B.S.) degree in Agricultural and Consumer Economics from the University of Illinois and a Master of Business Administration (M.B.A.) degree in Finance from Saint Louis University. He is a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) charterholder, and Certified Public Accountant (CPA).
Craig is a member of the National Association of Personal Financial Advisors (NAPFA), Fee-Only Network, and XY Planning Network.
Craig lives in the greater St. Louis area with his wife, Ally and son, Hank.