I wish someone had told me about all the hard costs you incur when selling your business. Without that knowledge, I became more aggravated as I wrote check after check that blindsided me throughout the process. It mimics getting hit in the gut day after day.
Knowing about the costs, I would have proceeded with the sale. But I wouldn’t have been so angry and frustrated throughout the process. I would have also approached elements differently.
While I can’t go back in time and make my business sale easier, I’m dedicated to helping other entrepreneurs avoid the miserable heartache I endured.
Understand the costs before you decide to sell your business. This essential step will reframe components and timing of your exit. Costs are broken into three major components.
These costs account for what service providers you will need in the transaction. They may include some or all of the following: transaction attorney, tax attorney, estate attorney, accountant or tax advisor, CVA/AVB (Valuation Experts), commercial broker for lease/purchase, banker, business transaction broker, property and equipment appraisals and certified financial planners.
Which service providers are needed for your transaction varies based on the complexity and size of your business. These costs can add up to 10-15% of the sale price.
Taxes include sales tax, federal tax and state income tax.
After the transaction costs are subtracted from the sales price the remaining amount is taxed.
First you have sales tax. The sales tax will be applied to the total value of the furniture, fixtures and equipment sold (FF&E) in the deal. Let’s say 20% of the million dollar sales price is FF&E. Then you will have Sales Tax on $200,000 added to your costs. This will vary by state. In California we have a 9% sales tax. That is $18,000.
Next up, state income tax. This only applies if you live in a state that has it. If you are in the 12% tax income bracket in California, state income tax will be $120,000.
Last you have federal taxes. Some small good news is that that both state tax and income tax are deductible from your federal taxes. It’s not going to help a lot, but better than nothing. After you deduct both the other taxes, federal taxes will be due on the remaining amount. For budgeting purposes, I tell my California clients to expect to pay about 35-40% in taxes.
All of this assumes that the company being sold is not an asset sale of a C Corporation. If the company sold is a C Corporation then the assets sold must pay corporate taxes at the State and Federal level before any income is passed down. Then you will need to pay taxes again at the individual level.
Closing the Business
Then there are expenses in closing the business down.
To start you will need to complete several audits. These include a final workers’ compensation audit, the general liability audit, payroll audits and sales tax audits. Some of the tactical costs include moving out of the office, the final state and federal tax returns, corporate minutes and state dissolution papers.
Additionally, you will need to close all of your accounts. This could include cell phones, vendor credits, bank accounts, lines of credit, 401k and benefit accounts.
Most of these items will take more time than anything. That being said, you are still looking at several thousand dollars to formally close the business.
Business Exit Roadmap
Just like knowing the costs associated with the sale of my business, I wish I employed an experienced professional to guide me through the process. The costs weren’t the only unexpected elements I ran into.
Having both gone through my own exit and helping dozens of other business owners go through theirs, there are countless mistakes I made along the way. Today I give business owners the tools and experience to avoid those mistakes.
One of the biggest benefits my clients see through working with me is designing the deal in a way to reduce the tax burden. There are multiple different ways to set up the deal to maximize after tax profit. Most of my clients earn more than my fee here alone.
For most business owners, your business is your largest asset. It’s not uncommon to find a business owner whose retirement plans hinge on the sale. You want to ensure that you maximize your after tax profits.
Together we can do just that and more. Contact me today to see all the ways I can enhance your selling experience.