How much does it cost to sell a business? Raphael owned and operated several cafes in his town. After years of putting his blood, sweat and tears into the business, it was time to retire. The market was good for selling his cafes as demand was strong for his type of business. Once on the market, it did not take long for a well-qualified buyer to express interest in buying his cafes. The price was not what he had hoped for but he understood that was partly due to him keeping his profits low to minimize his taxes which hurt his sales price.
Raphael was unaware of how much he would be paying in taxes and fees on the sale and how little he would actually net. Additionally, he owned the cafes as a C-corporation which involved 2 layers of taxation or double taxation. Consequently, Raphael could not afford to sell his successful cafes as he was dependent on the proceeds to retire but would simply not net enough to do so.
Too many business owners think about their business value without considering what they will actually net from the sale proceeds. Without preparation, a seller might risk an alarming amount of money from their business sale. In some situations, fees and taxes could go over 50% of the selling price. Clearly, taking the time to plan and prepare with your team of professionals can help you net more on what might be one of the largest asset sales of your life.
- If Raphael knew how the sales process worked several years in advance of when he wanted to sell, he could have prepared his taxes to accurately show the true profit of his cafes which would have increased his business valuation, selling price and net proceeds.
- Had Raphael known how much he would pay in taxes and fees, he could have worked on reducing the tax burden with experienced advisors.
- With more preparation, Raphael could have retired on his terms instead of working for more years to be able to retire.
Many business owners just think about the sales price when they think about selling their business. They don’t necessarily consider the costs involved with the their business sale and their tax exposure. Business owners estimate that the higher their sales price, the more they will net without factoring in the costs associated with the sale of their business. Without proper planning, the greater the business sale, the greater their costs in the form of taxes and fees.
Costs of A Typical Business Sale
Business sale costs will vary depending on the type of transaction. In preparing for a business sale, sellers should take the time to understand what costs will be involved and what their tax exposure will be. Failing to do so may lead to a shocking financial consequence. You want to avoid the disappointment of netting far less than you anticipated for all of your years of hard work. Determining these costs in advance provides you the opportunity to finish strong by increasing your business value via tax planning, business enhancements, increased sales, personnel changes, etc.
Business seller’s costs usually include:
- Federal and State Taxes
- County and City Taxes
- Back taxes
- Sales taxes in arrears
- Legal fees
- Accounting Fees
- Escrow Fees
- Business Broker Fees
Additional costs may include:
- Prepayment Penalties on Bank Debt
- Various transfer fees (lease, DBA, licenses, permits, etc)
- Franchise transfer fees
- Real Estate Transfer Taxes
- Severance or Retention Payments to Employees
- Balloon payment on equipment financing
When you know your tax consequences and fees prior to the sale of your business, you will learn what needs to be done to net more.
How To Better Prepare For The Sale of Your Business
Determine Whether You Are Financially Ready To Sell Your Business
Business sellers are frequently surprised that the proceeds from the sale of their businesses may not adequately meet their financial needs. The most significant figure that business owners should determine is how much they need from the sale, after taxes and costs. To do so, analyze your current net worth, determine your financial income needs post-sale, and consider your life expectancy, rates of return and taxes.
Determine Your Business Valuation Sooner Rather Than Later
Determine what your business is worth well before you want to sell. You need to know what you are facing and what you can do now to optimize your sales price and net proceeds.
It is important for business owners to gauge a realistic sales price early on in order to help them determine whether their after-tax value will be sufficient to meet their needs. If not, then the owner will have time to grow their business to meet the later financial needs to exit their business.
Make Business Improvements
Making improvements and investing in your business grows revenue, profits and your eventual net. There are many drivers of business value including business goodwill, great staff, optimized products and services, and established efficient processes and procedures. Buyers will pay for a well-oiled machine that consistently cashflows.
Consider Exit Strategies
Will you transfer your business to family members or employees? Will you sell to an outside buyer? You’ll need time to determine how much money you will net from each transfer option, as well as the non-financial implications of each type of exit strategy to see how well they match your needs. These decisions will impact you, your family, your employees and your future.
Prepare For The Sale of Your Business Well Before You Actually Sell
While this is not a complete list of all that you need to consider prior to selling your business, it hopefully will get you thinking about it sooner rather than later which is what you want to do. Connect with your financial advisor, business broker and other related professionals several years prior to the sale of your business to give yourself plenty of time to prepare.
If you are thinking about exiting your business, preparing early is better for your bottom line. How soon? Now is the perfect time to prepare for and plan your exit. You will be so glad that you did because owners who prepare maximize business value and minimize sales costs.
Contact us to help you prepare for your business sale well in advance.