Business owners who fail to consider the tax implications of selling their business are asking for trouble, says Randy Carver, president and CEO at Carver Financial Services Inc.
“If you structure the sale incorrectly and the proceeds are deemed income as opposed to capital gains, there can be 50 to 100 percent more tax paid,” Carver says. “Depending on what you’re doing, there may be ways to avoid the tax altogether, or defer it. If you’re selling to another company and you don’t need as much cash, maybe you do a stock exchange. There may be no tax implications at all.”
While it sounds like an easy mistake to avoid, Carver says he has seen far too many business owners take a less-than-committed approach to developing a comprehensive exit strategy before putting their company on the market.
“What if you intend to sell one business and then buy another?” Carver says. “There could be significant tax advantages to how you do that. So proactively, you as the business owner need to talk to your CPA and your attorney and say, ‘Look, here’s my plan.’”
Smart Business Dealmakers spoke with Carver about crafting a plan as you prepare to sell your business and about market trends that could affect your decision-making process.
Have a plan
The first question you need to ask yourself if you’re thinking about selling your business is, what do you want to do next?
“It’s a big mistake to not have a plan in mind,” Carver says. “Not so much a financial plan, but a personal plan. What is your day going to look like? What are you going to do? A lot of times, a business owner has been going 100 miles an hour leading their business. To suddenly go to zero can be very difficult personally.”
Financial considerations, including the effect of a transaction on your taxes, are obviously very important to think about as you plan. But until you’ve decided whether you want to buy another business, invest in private equity, start a family office or do something completely different, those variables are difficult to identify.
“I’ve been doing this for 30 years,” Carver says. “I’ve seen people that built a business, sold a business and have no definitive plan. They’re kind of just drifting. It’s not good. Find somebody you trust that you can talk to, whether it’s your tax person or your legal or financial adviser. They can help you structure a plan that most benefits you.”
Also talk to your husband or wife about what’s next.
“You’re either going to be spending more time together or finding something else to do,” he says. “So, I think it’s important to talk to your spouse.”
Secure your financial future
As you get into the financial end of planning for a sale, Carver recommends that business owners be as diversified as they can be moving forward after the transaction.
“Have enough cash for any anticipated expenses over the coming 12 to 18 months,” he says. “We’re in a very low interest rate environment. There is a tendency if you sell, you may still feel a need to replace your income. The first thing is, you don’t want to stretch for yield because a lot of times, you’re buying risk that you shouldn’t be taking. When bonds are yielding 2 or 3 percent, people are taking more risk to try to juice their income. With that being said, I think there’s some real opportunities on the equity side where you have growth potential, but current income that’s equivalent to the bonds.”
If you’re still not sure what you want to do next, there are options to put yourself in a better position financially as you think about the future.
“Consider getting into a higher-interest corporate money market where you get about two and a half percent today on cash,” Carver says. “It’s an interesting environment because the economy’s doing very well and the markets are doing phenomenally well. But I think the risk is more on the fixed income side as opposed to the equities. Given the interest rate environment, if someone thinks they may need cash, I would set that aside in a money market. Get that two and a half percent today until you definitively know what you’re doing.”