Going Outside to Sell Your Company
For business owners who are seeking a successor, the right person might be obvious. If you have a co-owner or partner, a buy-sell agreement can set the terms; if a younger family member is willing and able, you can decide on a way to transfer control. Otherwise, there may be a key employee who’s a logical candidate—or you might hire someone to take over eventually.
In some cases, though, this type of “inside” succession plan won’t be possible or practical. You’ll have to go outside to find a buyer who will take your place or who will hire someone to run the company. An outside sale can be financially rewarding, especially if there are multiple bidders, but it also may require more time and effort than a transition to someone you already know.
Ideally, the process of selling your company should start at least two to three years ahead of when you actually plan to sell it. You should make sure your books and records are in excellent condition and up-to-date. You should identify and begin to track any key metrics about your business. While it may be possible for you to run your business “by your gut” a prospective buyer will want solid, historical data. Resolve all outstanding legal and tax issues. When buyers discover these issues during their due diligence it can create uncertainty and worry about what other problems might be lurking behind the scenes. Finally, deal with any weaknesses in key positions. Buyers who sense they may have to clean house may opt to move on the next deal or may rightly expect a discount in the price to compensate for time and money recruiting new talent to the organization.
Once you have spent adequate time preparing your business for sale, consider engaging a professional valuation analyst to prepare a valuation of your business. With that valuation you can set an asking price, which may hold down the number of tire kickers and bring out serious buyers.
Negotiations can proceed from there, and not just on the purchase price. The new buyer might want you to stay on for some period of time; in many acquisitions, the ultimate purchase price may involve some type of earnout, where you would receive additional payments based on the business’ future performance. The more prepared you are, from a financial as well as a personal commitment standpoint, the more likely the final terms will be agreeable.
The sale of an asset as valuable as a successful business probably will generate major tax issues. You’ll want to maximize the amount you’ll receive, but a huge cash inflow in one calendar year is likely to result in a large amount of tax. Even if the amount is favorably taxed as a long-term capital gain, you also might trigger various surtaxes and phaseouts, so that your true after-tax amount winds up being less than you expected.
Accepting an installment sale, with proceeds coming in over several years, could make the transaction less taxing. (Be aware, the ordinary recapture income from the sale of depreciable assets has to be recognized in the year of sale.) The buyer may be more comfortable with this arrangement as well. If an earnout is part of the agreement, you might be able to structure the package so that it’s heavy on sales taxed as capital gains rates and lower on earned income, which is generally subject to higher ordinary tax rates.
Keep in mind that the buyer will have tax concerns, too. Often, a business buyer will prefer to acquire the company’s assets rather than shares of stock. Those assets may get a new basis, generating larger depreciation deductions. Such a deal structure might not be as favorable to you, the seller, but you might negotiate a plumper purchase price in return for some concessions there.
Expect the buyer to have a tax professional on the team to request favorable terms. If you are selling your company to an outside buyer or to an insider, our office can help you come away with a tax-efficient succession.