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Selling Your Business

You've started or taken over your family business, operated it successfully, and now it is time to move on. You now have to dispose of your business in a way that meets your lifestyle goals. In this article, we will explore key financial planning concepts for "selling" your business.

Some of you may be reading this article too late. If you are about to sell your business and this is the first time that you're thinking about it, you've missed important planning opportunities, and your options may have been limited. The best time to think about selling your privately held business is when you first start it. You should have developed an exit strategy when you wrote your business plan. An exit strategy outlines your business goals and helps plan for the best ways to dispose of a business in line with your lifestyle financial planning goals.

There are different options available in "selling" your business, depending upon your business's profitability and your own business and personal goals. You also need to weigh the tax consequences of selling your business. A business has several values. When the business was started, it had a start-up value (basis). Now that it's going to be sold, it has a sale (or market) value. You (or the current owners) may be liable for capital gains taxes on the difference between the sale value and the original value (basis).

Computing the values of basis and the current value of your business are complex calculations and should be done by a business valuation professional to avoid tax problems in the future. Simply put, basis in your business is all the money that you invested into the business since you acquired it. The market value of your business is the amount of money a buyer is willing to pay for it (regardless of what you think it is worth). You will have capital gains tax consequences for the difference between the two values. If the business is going to be transferred as part of an owner's gift or estate, there may also be gift and estate tax consequences. With careful planning, you can mitigate the tax consequences.

Do you really want to sell your business and take the money and run, or are you looking to raise money to improve or grow the business? Your answer is critical.

If you would like to raise money for your business, you can sell off part of your business to investors.

If you would like to raise money for your business, you can sell off part of your business to investors. You can do this if your business is a corporation or partnership. If, however, your business is a sole proprietorship, you will need to change your business structure. Investors can be active participants (such as managing partners) in your business or in a merger with another business, or they may be "silent" or passive investors with no managerial control. Taking investors as active or passive "partners" has zero tax consequences as long as you do not have a capital gain or loss on the transaction. Money invested increases the basis of the business by the amount invested (sale price?). If your business is large enough with substantial after-tax profits, you might consider "going public" and selling shares of stock to the public in a stock market.

When you sell your business outright, you must find a buyer willing to pay a price you are willing to accept. You become liable for capital gains taxes upon completion of the transaction. You can mitigate the taxes with careful planning.

The installment sale method is a popular way to mitigate the full tax effect—by spreading the sale over several tax years. The buyer makes an initial down payment and pays the balance plus interest over several years. The seller pays capital gains tax on the prorated gain on the down payment and principal portion of each installment, and pays regular income tax on the interest portion of each payment.

If a business is being transferred as part of a decedent's estate, the capital gains tax becomes a moot point. However, there may be an even more onerous estate tax with which to contend. In this case, a lower business valuation will reduce estate taxes. It is very important to have the business valued by a business valuation professional. Many factors are used to value a closely held family business, including discounts to fair market value due to lack of control by minority shareholders and lack of liquidity of the business. Once a business is transferred through an estate, the beneficiaries are free to continue the business or sell it in the open market for whatever price they can get—and pay capital gains tax on amounts received over the basis that was derived from the estate valuation.

All business ownership is transferred in time. How you transfer your business will have an effect on the benefits you receive and the taxes paid on the transfer. It is better to develop a business exit strategy well before the time you actually transfer your business so you have control over how the transfer progresses and so you are able to achieve your goals.