The original title for this article was going to be: "You mean I have to pay taxes on this?" This was inspired by conversations with a number of business brokers, because someone who has owned a business for 30 years, just might forget. If you own a business, chances are that someday will want to sell your business. What some owners forget is that when they sell their business (and not everyone can), capital gains taxes will be due! This article was written for owners as a reminder of how important it is to 'think early'.
While working on the board of the Business Transition Advisors, I meet many experts, including those who have high expertise with buying and selling businesses. I recently met with Jack Gruber with the Fulcrum Wealth Advisors who share a few examples about how he has helped business sellers develop tax savvy business strategies.
Five ways to sell (or buy) a business
There are five core options for dealing with capital gains tax issues when selling your business:
- Cash Sale
- All taxes are payed the year of the sale.
- IRC 1031 Exchange Program
- A taxpayer may defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property.
- IRC 453 Installment Sale
- (Less than $5 Million) - Taxes are due as the buyer pays the seller.
- IRC 453(A) Installment Sale
- (Over 5 Million)- Taxes are due as the buyer pays the seller.
- Monetized Installment Sale
- (453 or 453(A) utilizing a Qualified Intermediary) - Seller can defer tax bill as much as 30 years.
Of the five choices, the Monetized Installment Sale stood out. Receiving income from the sale and then investing 20% into a strong investment portfolio for the next 30 years is an interesting opportunity.
When the tax comes due, it is paid using interest earned from the investment portfolio. Each of us has different requirements for our capital and investment strategy and a deeper analysis to consider how and when to defer capital gains is needed.
When I meet experts on building a business, the first question they often ask is, “What is your exit plan?”
This is also a question applicable to technology decisions. When building technology, I want understand how that technology will support your exit plan. What I have found is that with a few technology adjustments, we can actually double value of your organization as you prepare for an eventual sale.
If you are thinking about how to exit your business in the next 1 to 5 years, do your research. I have included links to Wikipedia and the Fulcrum team above.
I am always appreciative of experts like Jack Gruber who have helped buyers and sellers create win/win solutions. I recommend that you reach out to Jack for more information.
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