When you sell your business, be prepared not just for financial repercussions, but for emotional ones as well. You may have spent a significant part of your adult life putting your heart and soul into making your business a success, and you have more sense of self-worth wrapped up in your company than you’d ever imagine. Sometimes it can be difficult to separate your identity from that of the business itself.
Once you have made the decision to sell your business, decide what role you are willing to play after the fact. Many business owners discover that a buyer wants them to remain involved for some period of time after the sale. An intelligent buyer will understand that much of your company’s value is the knowledge located inside your head. The buyer will want to be able to tap that information during the transition.
A buyer who is inexperienced in your type of business will probably want you to stay on for a while until he or she feels comfortable with day-to-day operations. You may be asked to commit to a training period. Will you stay involved on a daily basis for weeks, months, or not at all? Will you function as an outside consultant? If so, will you consult in person or over the phone? As the seller, you can choose to continue to play several roles in your business after the sale goes through.
In some cases a buyer may wish to ensure your participation in the business through an employment contract. Usually, this involvement is short-term. An employment contract can offer you some advantages, such as continued insurance, an expense account, and other benefits. But you must do enough work to qualify as an employee from the IRS’s point of view. You’ll also have to get used to the idea of no longer being in charge and taking direction as an employee. It makes a lot of sense to separate the employment contract from the purchase contract, so that an employment relationship’s failure doesn’t jeopardize the larger deal.
More often, buyers and sellers sign consulting contracts. The buyer agrees to pay you a set sum for a specific time in exchange for making yourself available for consultation. You’re paid even if you are not consulted, but you must remain available for the duration of the contract. This can be difficult if you intend to retire, and sometimes sellers arrange for outside consultants to stand in for them. Taxes are an important concern when you sell a business. After you sell the business, the amount of taxes you owe will depend on the internal organization of your company and how the sale is structured. If you plan intelligently, you can lessen your tax liability. It is important that you have a tax advisor or accountant to help you determine what’s best for you and for the company. These experts can also help you with various tax issues that you may encounter when you sell your business.
It’s vital to structure the sale so that you minimize the tax liability on the profit from the sale. For example, you can provide the seller with a financing arrangement involving installment payments or shares of the purchaser’s stock, in which case you should structure the sale so that you don’t pay tax on the gain until you have received every one of the installment payments or stock shares. Bear this in mind: the rate at which you’re taxed will depend on the nature of the gain. For example, the tax rate on capital gains is less than the tax rate on ordinary income.
Planning is the key component of any successful sale. You should expect the buyer to ask for some level of continued participation. By giving some advance thought to various options, you can facilitate a more favorable arrangement.