As a business owner, protecting the value of your company has always been a top priority. When the time comes to sell your business, make sure your decisions are tax-efficient. By minimizing the effect that taxes have on your sale, you will help preserve the value that you have worked long and hard to create.
So, as you prepare to sell your business, consider the following tax strategies.
1. Asset categorization
When negotiating with a buyer, you will have to agree on the allocation of assets. Some intangible assets are taxed as capital gains, while self-created intangible assets are likely to be taxed as regular income. Long-term capital gains are generally taxed at a lower rate than your regular income, so it may be in your best interest to transfer as much of your company's value as possible into tangible business assets, or specific intangibles.
Recognize that the after-tax value of selling tangible assets is likely higher than self-created intangible assets and consider and strive to maximize the portion of your business that can be allocated to assets that may be taxed as capital gains.
2. Deferred payment plan
The year you sell your business will usually be one of the highest-taxed years of your life. If you are confident in the solvency of the buyer, consider a deferred payment plan or staged buyout to spread out the taxation. Typically, the more tax returns your buyout is spread out across, the more tax efficient the transaction will be.
However, depending on your business and financial goals, it could make sense for you to receive the whole payment upfront. If you do so, be prepared to pay higher taxes on the sale of your business. Consult with your financial team to discuss what kind of sale will best help you reach your financial goals.
3. Work with a trusted financial team
Perhaps the biggest mistake that a seller can make is attempting to plan and facilitate the sale of their business on their own. Selling a business is a multi-faceted affair; it takes expert tax planning, wealth management, legal work and more. While you are handling this potentially life-altering event, work with a financial team you trust.
At TrueNorth Wealth, we regularly consult on the sale of a business. Proper strategy in these transactions can be the difference of hundreds of thousands or even millions of dollars in your pocket.