What to Know Before Selling Your Business
Building up a business is a valuable life experience, and selling it is just as exciting. Obviously, there is the financial gain, but you can also point to it and say, “I made that.”
But before you put up that virtual “for sale” sign, you need to stop and ask yourself three questions:
1. “I Sold the Business. What Do I Do Now?”
You’ve spent most days for the past few years working to make your business a success. Revenue has been consistently coming in, and the bills have been paid to keep the lights on. When you finally sell the company, those monthly revenues will suddenly stop – but the bills won’t. You’ll only have your sales proceeds on which to live. That money is not going to last forever. Eventually, you’ll need to start spending it, and, ultimately, you’ll be left with nothing. You’d be stunned at how fast it can disappear.
The solution is to have a plan before leaving the company. That way, you’ll know exactly where you’ll be going and how you’ll do whatever it is you plan to do next. Will you be setting up a new business by using the proceeds from the sale? Then budget for at least 20 percent more than you anticipate. Even better, test your next startup before you sell to give yourself assurance that the new business will succeed. Can you survive on your sales proceeds until then?
When I sold my first business, I didn’t have a plan for what I’d do next. I was fortunate to start my current company, but I cut it close. The first revenues from my current company hit the bank account on the day I was about to go broke.
2. “What Do I Have to Pay the IRS?”
Given all the planning that business owners put into the sale of their businesses, it’s surprising that many forget that the government will want some of your windfall. But it’s important to have a good idea of just how much the IRS will take before you put your business up for sale. If you are going to answer the first question (“What do I do after I sell?”), you’ll need to know just how much money you’ll have left to get you to the next phase of your life.
So, how much does the government take? The answer depends on a lot of factors. Your business formation, how the purchase price is allocated, your personal income, and your state of residence all have an impact. If you are lucky and can classify the sale of your business purely as a capital gain, you will likely pay between 15 and 20 percent. What you need to worry about is whether taxing part of the proceeds as income will put you into a higher tax bracket altogether. You could lose certain deductions and pay a higher rate on your regular income.
As if that weren’t enough, federal taxes are not the end of it. Your state then comes in, expecting its share. Some states will require that you escrow a portion of the purchase price to guarantee they get paid.
In short, taxes are important to consider. They’ll play a role in telling you how much profit you are actually going to make. Consult with an accountant before you put your business on the market to find out what impact the sale of your business will have on your taxes.
3. “How Much Value Can I Add by Waiting?”
Many of us are naturally impatient, especially when we have pressing plans that we’d love to pursue. But quite often, time can make a massive difference to the sale value. Buyers love businesses that prove their stability over time, so businesses that have long, established histories often garner higher prices. In addition, if your business is growing in profitability, it is likely also growing in value with each passing month.
There can also be potential value in waiting if your business is trending downward. Stabilizing profitability and showing potential buyers that immediate failure is not the destiny of the business will encourage buyers to take a bigger risk on your business than they might otherwise take. The value of your business changes frequently, so before you sell, get a sense of just how aggressively the value might change over the next 6-12 months and make a decision accordingly.
Clearly, selling a business involves a lot more than three questions. But pondering these three before taking action can build a solid foundation on which you can firmly decide whether or not you should move forward to the next stage.
A version of this article originally appeared on BusinessCollective.
Mark Daoust is the founder and CEO of Quiet Light Brokerage, a website brokerage firm that sells profitable websites valued between $100K-$5MM. Quiet Light’s team is comprised of successful Internet entrepreneurs who have all started, bought, and sold significant Internet enterprises.
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