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Are you expecting the sale of your business to fund the majority of your retirement? This video highlights key topics to keep in mind when planning the sale of your business.
If you have spent much of your life building your business, and you are expecting the sale of your company to play a significant role in funding your retirement, it’s crucial to plan early.
Let’s talk about four of the most important factors, all of which are intertwined.
First, long before your desired retirement date, you need to determine whether you will be selling to a person or group of people within your company, or selling outside your company. This can make a big difference in the buyer’s ability to pay cash, get a bank loan, or reliably make payments directly to you, therefore it can make a big difference in the sale structure.
The second factor IS THAT sale structure. Will the business be sold for a one-time cash payment of the full sale price, or sold on installments over time. When a business is sold for a one-time cash payment to the seller, the buyer is assuming all the risk in the transaction, so the sale price is typically lower. But if the buyer is paying for some portion of the sale price in installments directly to the seller, now the seller is assuming some risk that the buyer defaults on some portion of the payments, and some risk that tax rates on those payments increase in the future. So, because the seller is taking some risk, the sale price is normally higher to compensate the seller for assuming those risks.
Third is the sale price. Planning your retirement around the sale of your business without knowing its true value, is like someone planning to retire without any idea how much is in their 401(k). That wouldn’t make sense, right? Having a business valuation performed by a company with expertise in the same industry, that can provide a range of valuations based on a variety of sale structures, will provide a much better picture of where you really stand.
Lastly, both valuation and sale structure, will determine what the total tax liability will be on the sale of your business. It’s possible that some portion could be taxed as ordinary income, but likely that much of it will be taxed as capital gains, which under current tax law, is a significantly lower tax rate. And though, as I mentioned before, tax rates on future installment payments could increase, it is at least wise to have the most accurate estimate possible, as to what you will net on the sale of your business…after taxes.
As you can see, every situation is different, but careful analysis can bring the visibility needed for a business owner to determine what will work best for them when converting the sale of their business into a successful retirement.
I hope you have found this video to be of value, or maybe you know of a business owner that might find it useful. If so, feel free to forward the video to them, and please don’t hesitate to give us a call if you have any questions.
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