Selling Your Business?

Selling 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 in your company's 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 liabilities 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 assets may also be taxed as capital gains to the extent that the payment is higher than the amount of your basis in the asset.

• Recapture of depreciation. In this case, various assets from your business could be depreciated, which can entitle you to a tax deduction that will also reduce your basis. There are other items to consider with the sale of a closely held business, particularly if you are selling the company to a related party. For instance, if property is sold to a relative and you incur a loss on the sale, you won’t be allowed to deduct that loss. Likewise, if there is a gain on the sale of depreciable property to a related party, it will be taxed in full as ordinary income (versus as a capital gain).

Other Important Considerations

As a business owner, you are typically able to purchase supplemental business insurance coverage that offers a cash benefit after a disabling illness or accident, to help you pay living expenses and other costs that are not covered in traditional policies. If you don’t already have this type of insurance in place, it is a good idea to set it up now, as you can oftentimes take the coverage with you when you sell or leave the business.

Younger business owners should also consider purchasing a personal disability insurance plan that pays income benefits even if a disabling condition is not job-related. This is particularly important because most workers’-compensation plans won’t provide benefits unless you are injured on the job. It is typically easier to qualify for health and disability coverage as part of a group-benefits plan, so these coverages should be considered sooner rather than later.

If you own the property where your business is located, another component of selling the company could be the sale of the underlying real estate. In this case, though, you may want to consider keeping the property, renting it to the new owner, and receiving a passive-income stream.

Beginning the Sale Process

There are many factors that need to be considered when selling your closely held business. Because of that, it is recommended that you include several professionals who can help walk you through it. These should ideally include a financial advisor, an accountant, an attorney, and a business broker, where necessary. That way, you can be more assured that the transaction is properly conducted and that it is in your best interest.