Selling Your Business: 5 Steps to a Tax-Smart & Profitable Exit

In comparison to selling other assets like stocks or even a house, selling a business can be a much more complicated and time-consuming task. If you’ve ever had that thought that said “how do I sell my business,” before embarking on the actual journey of selling your business, here are 5 key points for you to consider as you look to ultimately exit your business.

1. Mapping Out Your Sale Timeline

Selling your business can be a drawn-out process (sometimes taking several years to complete). The process of even finding the right buyer could alone take long. Between initially finding said buyer, negotiating sale terms, going through due diligence, closing, and then potentially having a retention period where you stay involved with the business, it can be several years before you’ve completely exited.

For these reasons, the sooner you can gain a grasp of what your preferred sale timeline will look like, the better you’ll be able to set expectations, draft milestones, and benchmark. If you’re a business owner already thinking about your exit, it’s never too early to start mapping this out.

Succession Planning 101: Who Runs Things When You’re No Longer There?

A major question to ask yourself in this process is what will your succession plan look like? Who will be running the business when the current ownership exits? This is important because even though the buyer or buyers may have a plan, it’s also important that a smooth transition is in place. By having a desire or framework for a succession plan, you’re showing a potential buyer that regardless of your involvement, the business can still operate — and that’s an extremely attractive quality when a buyer is evaluating whether to purchase your company.

Think about documenting key processes, identifying essential personnel, and ensuring institutional knowledge isn’t solely concentrated with you.

2. Finding Efficient Tax Strategies

As the owner of a business, depending on the entity structure of your sale, there could be serious tax implications, including capital gains taxes and potentially ordinary income recapture from the business as well. The net effect of this can mean that what you thought you’d walk away with may look different after taxes take their portion.

Additionally, if your top brackets have become predominantly a large portion of your gross proceeds, these can compound quickly. It may be beneficial to implement a retirement plan for your business (e.g., a 401(k) with profit sharing) prior to the sale, as well as looking into other strategies like installment sales, opportunity zone investments, or charitable strategies that may help reduce the tax burden.

The bottom line: tax planning for a business sale should begin years before the actual transaction, not weeks before closing.

3. Assembling the Right Team

Selling a business is a major transaction that you’re likely to only go through once or twice. Waiting until you’re on the doorstep of a deal to seek help is too late. While the parties involved may vary, your core group is likely to be comprised of the following members:

• A Broker or Banker: Your business broker or investment banker is going to be focused on finding a suitable buyer for your business. They can help with valuation, marketing the business confidentially, and overseeing the process of moving the deal forward from initial negotiations to eventual closing.
• An Attorney: Regardless of the size of the transaction, having an attorney draft, review, and finalize the legal terms of the sale is essential for protecting your interests.
• An Accountant: Your accountant may assist in the due diligence process by first ensuring your bookkeeping is in order. They’ll also be instrumental in helping you see projections of what the tax implications may be so you’re not blindsided come tax season.
• A Wealth Advisor: Your wealth advisor’s role is to help understand and provide clarity on what the impact from the sale of your business is going to look like. Their primary objective should be to help you create a plan for the future. Most importantly, a wealth advisor should guide you through the emotional aspects of selling, not just the financial ones, to ensure your post-sale life aligns with your broader vision.

4. Identifying What Post-Sale Life Looks Like

This point should be one of your higher priorities. If you’ve built a business up over many years, chances are you’ve set the type to all but live for work. Replacing that identity post-sale is not something to take lightly. It’s easy to think the next chapter will sort itself out, but many business owners find that the sudden absence of daily responsibility can be jarring.

Maybe it’s spending time pursuing your hobbies like traveling or tackling home improvement projects. It could be exploring various philanthropic causes by joining the board of a non-profit or simply volunteering. It could even be starting a new business! The key is to have a plan for what comes next — not just financially, but personally.

Give yourself time to really think through what your post-sale life looks like so you’re stepping into a new chapter with purpose, not uncertainty.

5. BONUS: Making a Health Savings Account Contribution

On the list of priorities this one is probably lower on the scale of importance, but can be tremendously helpful over the long term. With the ever-rising cost of healthcare, having an account dedicated to covering future healthcare-related expenses tax-free can be really beneficial. And as long as you have an eligible high-deductible health plan before the sale closes, you’re able to contribute to an HSA.

If you’re considering selling your business and aren’t sure where to start, we’d love to talk. Please contact us to discuss specifics of your financial situation and to see if working with Oread Wealth Partners could bring value in working towards your financial goals and objectives.

‍