Structuring the Terms for Selling Your Business
If you are planning to sell your business, it’s important to understand the kinds of deal options that can be structured to close and the corresponding tax implications. We recommend that you do your research and rely on guidance from your attorney, accountant, and business brokers before you begin the process of selling. Advance planning can save you from potentially unfavorable taxes and fees.
As the seller you want to structure a deal that meets your financial desires. On the other hand, you need to offer a deal that buyers will be willing to accept. A smart strategy is to create a deal that benefits all parties involved.
Different Options for Structuring the Deal
There are two ways to structure an earn-out deal. One option is the buyer pays a set portion of the total amount of the at close, and the seller agrees to stay on for a set amount of time (two or three years) as a consultant to help with the transition to the new ownership. This deal typically benefits the seller, as he or she is able to get money upfront for the business. It is also possible to earn a salary during the transition phase.
At the same time, an earn out can benefit buyers. They can shift some of the money usually included in closing costs into salary and bonuses, thereby, incentivizing everyone involved to keep the business operating profitably.
The second way to structure an earn-out deal is the seller receives some money and then bonuses paid out over the next few years based on the earnings of the company. This can help sweeten a deal because the buyer sees the seller having confidence in the company’s continued success. The seller is essentially investing in the future profitability of the company.
Both of the above-described scenarios likely mean lower tax bills, as the funds are spread out over time. Always discuss the tax implications of any closing deal with a certified accountant before you decide on a earn-out deal.
Cash Deal Options
In an all-cash deal, the entire purchase price is paid at closing. The seller is owed nothing beyond that from the buyer. However, he or she is responsible for the large tax liability that may incur.
A cash plus seller financing deal is more typical. This situation means that the buyer only pays a portion of the agreed upon price and signs a promissory note to pay off the additional funds due, with interest, over a certain time period. Sometimes the seller opts for balloon payments at a future date. This kind of deal has advantages for the seller and the buyer. The seller gets some money and can look forward to payments in the future, which spreads their tax liabilities out.
When it comes to this type of deal, the advantage for the buyer is easier funding and having cash flow to keep the business operating profitably. They are also getting the added security from the seller’s belief that the business will stay profitable.
Careful planning and consulting with professionals can help you facilitate a speedier and more profitable sale of your business while minimizing tax penalties. Be sure to talk to your accountant, attorney, and business broker about your concerns, and they will help you to strategize about the best path forward for your unique situation.
Steve Ford is Executive Vice President of Creative Business Services/CBS-Global.
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