There are few things worse than having a feeling of success completely throttled by unexpected bills, fees, or, worse, taxes. Yet countless business owners get blindsided by these fees when they sell their businesses. It takes what should be a celebratory moment to a gut-wrenching one.
I should know. I found myself in that exact position when I sold my business over a decade ago.
This is one of those experiences I wish I learned in a book. Alas, here we are. The good news is that costly experience led me to helping other entrepreneurs close their businesses, which ultimately birthed Exit Consulting Group (ECG). Today, we work to ensure that our clients never have to experience that feeling.
If you have a sale of your business on the horizon, here are several oversights that could come back to bite you.
In my glorious state of California, we “enjoy” an 8% sales tax. That sunshine tax just keeps giving. Whenever you sell an asset here, the government wants a cut. That’s why when you do a private sale of a car, the new owner has to submit the bill of sale to the DMV when they register it. The DMV is eager to collect that sales tax.
For businesses with physical assets, you’re in the world of paying up sales tax. Have a fleet of trucks? What about a lot of manufacturing equipment? Yes, I’m talking to you. Outside of inventory, if it occupies space, it is subject to sales tax after the transaction. We often use the terms furniture, fixtures, and equipment. The value that will trigger sales tax depends on how you have been depreciating your equipment.
Traditionally, seller pays the sales tax, but one thing we’ve learned in this business is that everything is negotiable. The key is to know about this going into the deal so neither you nor the buyer are caught off guard when Uncle Sam comes collecting. You never want him coming back to bite you. Let’s just say that it hurts.
Cash, Receivables, and Payables
The second snag boils down to the cash, receivables, and payables. When you sell your business, you are selling the assets (such as furniture, fixtures, and equipment), the different processes and systems established in the business, and the goodwill you’ve cultivated in the community. Think of it as the new business owner coming in to a clean slate. They need to take the platform you’ve created and go out and earn their own way.
You keep what you’ve made, which means the cash and the receivables are yours. But hold up, that means you need to pay what you owe as well. You can’t walk away with a bunch of incoming cash and leave the new owner to pay your existing tab.
The last potential blind spot comes in the form of debt. Think of any debt you currently have in the business. This could include a line of credit or equipment financing. When you sell your business, you still own that debt. It’s your job to settle up with any existing debt you had before the deal. More than likely, the new owner will have their own debt to address.
Here’s the catch: You have to pay off outstanding debt with after-tax monies.
While it might not seem like a lot at first, this is actually a very important nuance. Let’s look at an example to highlight how this may seem like a brutal blow. Say your business sells for $1 million. Typically, your professional fees and closing costs total about 10% of the transaction. Taxes will shave off another 30%. This leaves you at $600,000 after-tax dollars. Now you get to pay off any debts. Let’s say you have a $100,000 line of credit and a $50,000 equipment loan.
That $1 million sale has been whittled down to $450,000.
Needless to say, few business owners enjoy this last bill they have to pay.
That’s why it’s essential to do two key things:
- Create a tax strategy for selling your business;
- Understand how much after-tax dollars you need for the next phase.
How to Avoid Being Blindsided
The best strategy for a successful business transition, whether you are selling your business or closing up shop, is to partner with our team at Exit Consulting Group. We help business owners navigate all the hurdles that come with transitioning out of their company.
By leveraging our game book and taking advantage of our four-phase selling cycle you avoid that financial whiplash that many business owners experience.
In fact, we build out customized in-depth strategies to help you reach your unique business and personal goals for your transition. This includes developing creative strategies to reduce your tax bill. Once we finalize your goals and build out the strategy, our experienced team covers every angle of your transition to ensure there aren’t any unwelcome surprises in the process.
Because no one wants to have Uncle Sam showing up unannounced on their door, call our team today. We are your full-time exit partners.