Impact of Tax When Selling a Business

What is the impact of tax when selling a business? Most small business owners spend a lot of time wrestling with the decision about when they will put their business on the market and try to sell it. There is no question that selling a business is an important decision for its owner as it touches many aspects of their life. These aspects of their life include their financial security, their perception of how successful the business has been or alternatively, has the owner taken the business as far as they can take it. However, probably the most important aspect of all is what the owner wishes to do with their future and whether or not they see themselves owning and operating the business.

All of the above and many more reasons take time to consider arriving at the right answers. If the owner no longer sees themselves owning and operating the business and wish to sell, there is an important need to consider the tax implications if they sell the business. The tax implications happen at two levels. The first level is the tax consequences preparing the business for sale. The second level is the impact on taxes when the business moves from the current owner to the buyer. If you are considering selling your business, here are some tax consequences to consider as you contemplate whether or not you will sell the business.

  1. Understand the differences between a Stock sale and an Asset sale. Buyers generally prefer an Asset sale as it eliminates legal liabilities and allows the buyer to start depreciating assets all over again.
  2. Consider maximizing the amount of charitable contributions to closely held business interests
  3. Consider receiving some of the purchase price of the business in installments such as through payment of a salary, a management agreement or a consulting agreement, This allows the seller of the business to receive income when they stop working in the business and therefore no income tax for wages or salaries.
  4. The tax benefits of an installment sale. An installment sale allows the seller to be paid some of the proceeds from the sale of the business to later years thereby spreading out or deferring to future years the tax liability the income would generate.
  5. An additional strategy with the last suggestion is to increase the rate of interest the seller is paid on the installment sale once again deferring to future years the tax liability.
  6. Understand that the value the business sells for revolves around the discretionary earnings of the business so all cash that flows through the business is reported, non business discretionary items are no longer run through the business and any unusual one off occurrences are clearly documented so a buyer can see they are not a normal part of the way the business operates. For example, the business may have a settlement with an employee that involves a one-time payment or the owner may be going through a divorce and paying the attorney fees through the business. These one-off events reduce the profitability of the business but the appraiser should not consider these when they appraise the business.

The tax treatment for different types of legal entities is not the same. A sole proprietor, LLC or partnership will have much different tax outcomes to a corporation. The tax treatment may be entirely different for an S Corporation than a C Corporation. If the owner of the business wishes to maximize their tax position it requires an appropriate amount of planning and guidance.

Because the tax impact from selling or buying a business is complex and can create tension in the transaction, a company that specializes in business exit tax strategies to help both buyers and sellers is Walker Advisory Services in Texas. Walker Advisory Services can work directly with you to offer their tax planning suggestions or in conjunction with your CPA or tax agent. Their specialization of tax planning strategies exposes them to this difficult area of tax law and uniquely positions them to support the nuances that relate to the selling of a business or buying of a business.

Delivered From a 3-D Business – How To Be Set Free From Delays, Difficulties and Dead Ends

I talk to potential business owners and even those who have been in business for at least 3 years and discover that they thought business ownership was going to be easy. Even though they have heard the statistics that start up businesses don’t survive the first two years of business and that government data shows that only 5 out of 10 new businesses survive for 5 years, many are still convinced that it’s a pretty easy road to tow. What they fail to realize is that ALL businesses, start- ups and existing, will face 3-D (delays, difficulties and dead ends). One characteristic you must have as an entrepreneur is PERSEVERANCE because you will face many unexpected challenges in business and you must be prepared to handle them and set free.

Let’s look at some examples of 3-D that businesses face and some ways they can be delivered.

DELAYS: You have been diligent in putting your business plan together and ready to take it to the bank for funding. Eager to get the business up and running the bank is requiring additional paperwork, financials, etc. So the funding process has been delayed from 2 weeks to 6 weeks.

DELIVERY: Be proactive and eliminate the delay. Make sure you have all your financial documents prepared. Ask the bank their requirements. Usually they request the following:

ü Balance Sheet

ü Income Statement

ü Cash Flow Statement

ü Business Documents

ü Detailed list of assets and proposed collateral

ü Personal Financial Statement

ü Credit Reports

ü 3 years of personal tax returns

ü Business Tax return (existing businesses)

ü Business Plan and Marketing Plan

ü Sources and Uses Plan

ü Loan Request Package

DIFFICULTIES: A common problem for many business owners is that they think they can do everything on their own. They use the excuses of “I can’t find qualified people” or “Nobody can run my business like I can. I don’t trust anyone with my baby” or “I can manage this alone until business grows”. This “one-man band” strategy may seem like a way to keep costs low at first, but it’s not the smartest way to ensure long-term success. It will become more difficult to control as time progresses. Plus being a “one-man band” does not give you the opportunity to work outside the business because you are inundated with handling the day to day operations.

DELIVERY: Utilize your network of contacts or social media to find referrals for qualified, professional employees. If you cannot afford to hire a lot of employees contact trade schools, colleges or universities for interns. They may be available for free or a small stipend.

DEAD ENDS: The business is at a standstill, sales have declined and the need for your product or service had diminished. Your business has come to a dead end.

DELIVERY: A couple of options come to mind. First, try to adapt to the business to make it work. Consult with a business advisor to assist in identifying the problem and consider resolutions. Do you need to target different customers, change your pricing structure, leverage the existing infrastructure, etc.? Secondly, see if there is an opportunity to change directions and create a derivative (a specialized company created out of a broader company). For someone who has a computer sales business the derivative might be a computer repair and maintenance business.

Delays, Difficulties and Dead Ends are a part of the business lifecycle which forces us as business owners pause and think about the method of Delivery so that our business can be successful. That delivery is the release needed to accomplish other things in our businesses.

The Biggest Myth About Business Success: Part One

Last week I attended the Business North West 2012 event at G-MEX Manchester. As I listened to one successful entrepreneur after the other gave what they considered their motivational messages about how it is possible for anyone to establish and run a successful business, an odd question popped into my mind. The question is this: is it possible for just anyone to start a business and succeed?

My answer to this question is simply no!

As I listened to many of those successful entrepreneurs giving their woe-to-win stories explaining how they overcame obstacles to succeed. I detected one similarity in all of their stories; not a single one of them explained how they did it.

It is easy to pump people up with motivational bla bla bla about how it is possible to achieve greatness bala bo balaba but without telling them how to do it, the cause is lost from the onset.

The biggest myth in the world of business is this: business is common sense. That is the biggest BS going around in the business world that is causing people to mortgage their homes and the future of their families to plough the funds into business ventures that are certain to fail.

If you attended the Business North West 2012 event or you have attended any event recently where you heard successful business people tell you that all that is required to succeed in business is to have belief and balls. Before going to tell your boss and telling him where to stick his job or mortgaging your house read the rest of this article.

Trust me on this one, just hold your fire until you have read the rest of this article because those guys did not tell you the full story.

Business is not common sense. I will repeat this point: business is not common sense. Business is a skill and a profession like any other profession; it must be learnt. The likes of Steve Jobs, Bill Gates, Richard Branson or Donald Trump did not start their business from literally nothing to multibillion businesses just by having common sense. What I keep telling all of my clients is this: the gap between one thousand pounds and a million pound is just a single idea or getting a single decision right.

However, you need to have that single idea or you need to be able to get that single decision right. The idea and the ability to get that single decision right do not only take common sense.

There are four elements responsible for the success of any business, whether it is the HSBC bank in the City of London or a toilet cleaning business in a dusty New Delhi.

The four elements are:

- Visionary leadership
- Good people
- Good system
- Good marketing system

There is a fifth element which is the glue that holds all of them together:

- A good business model

A friend of mine just received half a million pounds from his father to invest in any business he pleases. He identified three businesses and called to ask my advice as to which one would be the best one to invest in. I told him that he could invest in any of them and succeed. He tried explaining to me that one of them seems to have a good profit margin, the other was a cash cow with low profit margin and he was not very sure about the third.

What I told him was this: every business has a hundred percent chance of succeeding or a hundred percent chance of failing. Success or failure in any business is not the function of the type of business, the location, the economy or the product. Success or failure in any business depends on those four elements especially the fifth one.

Before Facebook, there were many social media sites. Why did Facebook manage to dominate all of them? Before Google, there were other search engines, today Google is synonymous is search engine; how did it happen? Is Microsoft successful because they have the best operating system in the world? Windows is probably the least secure operating system in the world, yet Microsoft dominates its rivals.

Facebook and Google are successful because from the onset their founders made the crucial decision of making their services free and then found creative ways of making money from their services. Microsoft’s success stems from their ability to form alliance with other big corporations and governments.

What I have tried to demonstrate with the above examples is that success in business does not occur as a result of common sense or big balls, but the result of the above five elements that all of the successful entrepreneurs at the Business North West 2012 event failed to point out. Inevitably, it can be deduced from this article that, it takes more than common sense to succeed in any business venture.