MONEY SMART By GRACE S. YUNG, CFP
Selling Your Business? Don’t move forward until you have all of your bases covered.
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elling a closely held business is a big decision, because in many cases the current owner or a loved one likely put many hours (and dollars) into starting and building the company. So, in addition to the sale having an impact on your income and assets, there can be an emotional factor, too. The sale of your business can actually take many different forms, and it can also raise a number of legal, tax, and financial planning issues that you’ll need to consider. For this reason, it is essential to have a good understanding of the process before you put your business up for sale. How Will You Be Compensated? One of the key elements of selling your closely held business is determining how you will be compensated by the buyer. There are a number of different forms this can take, such as: • Cash for the sale of the company’s stock. Selling your (and your employees’) shares of stock in your company to the buyer for cash is typically the easiest route to take. This allows you to step away from the business completely, in return for a lump sum of cash that you can use for any purpose. • Cash for the sale of the company’s assets. By selling only the company’s assets (and holding on to your shares of stock), you would remain a shareholder in the business, and still have a say in its operations. • Exchanging stock in your company for shares of another. In this case, if the buyer of your company currently owns another business, you could exchange your shares of stock in your current business for shares in the buyer’s company. • Selling your company’s assets in exchange for stock of the buyer’s company (if applicable). Rather than exchanging stock with your company’s 30 NOVEMBER 2019 | OutSmartMagazine.com
buyer, you could instead sell your business assets and obtain shares of the buyer’s current company (again, provided that the buyer presently owns another business). • Converting your business to a publicly-traded company. Converting your business to a publicly traded company— which would require engaging in an IPO (Initial Public Offering)—could allow you to remain a shareholder, but with a much smaller percentage of ownership. Watching Out for Mistakes and Liabilities Because there are many components involved when selling a closely held business, it is essential to ensure that you move through the process cautiously and that you are aware of any potential liabilities your company may be exposed to. These could include various contractual obligations, unpaid taxes, or even possible litigation. There may be potential liabilities that are not yet known that could become an issue down the road. These current or future liabili-
ties must be addressed in terms of who will bear the burden, both now and later on. Another consideration with selling your business involves the tax consequences. Keep in mind that what is best for you, the seller, may not necessarily be agreeable to the buyer. For instance, the buyer may wish to deduct payments sooner rather than later. These may include payments for: • Your continued consulting services, which are usually deductible for the buyer in the year they are paid. • Depreciable assets, such as the company’s building (which is typically depreciated over a period of years). • Non-depreciable assets, such as unimproved land or shares of stock that are not deductible. On the other hand, as the seller, there are a number of tax-related consequences that could occur, such as: • Payment for your stock will generally be taxed as a capital gain (provided that it exceeds the amount of your basis). • Payments from the buyer for company
