Post-Sale Considerations When Selling Your Business

When preparing for an exit, many entrepreneurs focus solely on optimizing their business before going to market. While that’s an important step, it is also crucial to take into account post-sale considerations when selling your business. Taxes, deal structure, legal matters, and personal priorities all play a large role in determining the success of your exit. 

In this article, we discuss:

• Financial and tax implications of selling your business
• Why your deal structure matters for your post-sale experience
• Legal implications of selling your business
• Personal post-sale considerations when selling your business

“For anyone interested in minimizing their tax burden, the split between capital gains taxes and income taxes is crucial.”

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Financial and Tax Implications of Selling Your Business

Paying taxes is one of the inescapable facts of life. When you sell your business, your tax burden could change significantly. However, the specifics of your deal structure and terms will have an impact on the total amount you pay in taxes. 

As such, it is extremely important to be aware of the financial and tax implications of selling your business. This will allow you to plan ahead to minimize your costs. 

Asset allocation agreement

When you sell your business, there are two types of taxes you may be required to pay: personal income taxes and capital gains taxes. While tax rates differ depending on tax legislation, the capital gains tax rate is currently much lower than the income tax rate.

For anyone interested in minimizing their tax burden, the split between capital gains taxes and income taxes is crucial. Generally, the more of your profits from the sale of the business that can be classified as capital gains, the less you will pay in taxes.

This is where asset allocation agreements come into play. When you sell your business, you and the buyer negotiate and sign an asset allocation agreement. This agreement classifies the assets sold in the deal as either capital assets or noncapital assets. 

Capital assets are assets that have the ability to continue producing income for the owner into the future. This includes real and depreciable property. Noncapital assets are assets that are not directly attributable to the business’s operations. This may include:

• Copyrights
• Receivables
• Inventory
• Personal property

The asset allocation agreement also assigns a dollar value to each asset. As you can imagine, the dollar value of an asset, and to some extent its classification, is up for interpretation. Many business owners seek to construct an allocation and valuation of assets that create a more favorable tax situation for them during the sale. In general, the more capital assets you have, the less taxes the seller will need to pay.

What may favor the seller may not benefit the buyer, however. The outcome of the negotiations determines the asset allocation agreement. Regardless, all allocations and valuations must be reasonably justified and abide by IRS rules.

Income taxes

Depending on the makeup of the asset allocation agreement, you may need to pay all or part of your taxes from the sale of your business as income taxes. The income tax rate you pay will depend on the tax bracket you fall into. 

For tax year 2023, that could range from 10 percent on the low end (which is unlikely) to 37 percent on the high end. The highest tax rate (37 percent) applies to that portion of income greater than $578,125 for individuals or $693,750 for married couples filing jointly. 

All assets in the asset allocation agreement classified as noncapital assets are subject to income taxes. 

Capital gains taxes

You will need to pay capital gains taxes for all assets classified as capital assets in the asset allocation agreement. In order to tax capital assets at the capital gains rate, you need to have owned them for a year or longer. The capital gains tax rates starts at 0% for single filers with capital gains income less than $41,675, for example. The high end can reach 20% for single filers with capital gains income of $459,751 or more.

The capital gains tax rate starts at 0% for single filers with capital gains income less than $41,675, for example. The high end can reach 20% for single filers with capital gains income of $459,751 or more.

“The structure of the payments you receive for the sale of your business can also impact your tax liability.”

Sale timing, payment terms, and taxes

The timing of your sale and specific payment terms have a large impact on the amount of taxes you must to pay.

Start with the timing of your sale. Your taxable income factors in your profits and losses for the taxable year. If you sell during a year of significant loses, your taxable income is likely reduced. This could put you into a lower tax bracket and lower the total income subject to taxation. 

You must weigh any tax benefit against the losses resulting from a lower purchase price. 

The structure of the payments you receive for the sale of your business can also impact your tax liability. If you receive the full amount in one lump sum, it may push you into a higher tax bracket, depending on the value of your business.

However, by spreading out the payments over the course of several years, you may be able to arrange it to where you fall into a lower tax bracket each year. This could significantly lower your tax liability. 

Broker fees

When planning your post-sale finances, it is important to take into account any fees you may need to pay to your business Advisor.

Selling a business can be a complex and challenging process. Most entrepreneurs who sell their business decide to work with an experienced Advisor (e.g., business broker). Typically, an Advisor charges a percentage of the sale price for their services. 

However, a good Advisor should more than make up for their costs. They can help you optimize your business prior to selling. This creates more demand for your company by accessing a larger pool of qualified buyers. They can also assist you in effectively negotiating with interested parties. All of this may ultimately allow you to sell your business for more than you would be able to without their help.

Working with an accountant

Adequately planning for your post-sale taxes and finances is a complex endeavor. There are a range of rules and regulations to sort through. Knowledge and inexperience is invaluable to achieving the best outcome.

For this reason, it is extremely important to work with a qualified accountant when planning for your exit. They will be able to help you develop a strategy that allows you to minimize your tax burden while abiding by all laws and regulations. 

“Most deals will involve a period of post-sale training.”

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Why Your Deal Structure Matters for Your Post-Sale Experience

As a business owner, there are many ways to structure the sale of your company. The terms that you and the buyer agree on could have significant implications for your post-sale experience. 

Post-sale training period

Most deals will involve a period of post-sale training. The training period comes just after finalizing the deal and transferring assets. During this time, you must provide instruction and guidance to the new owner on how to run the business. 

This period usually lasts only a few weeks. If your business is more complex and requires more in-depth training, however, you and the buyer may agree to a longer training period. Regardless, training often involves a phase of more hands-on involvement. It also involves a phase where you are still available to answer questions or emails.

All-cash deal structure

As we have discussed, the total sale price can be paid in one lump sum or spread out over several separate payments. When it is paid in full at the time of closing, it is often called an all-cash deal.

Tax implications aside, there are certain advantages of an all-cash deal. Many business owners prefer to receive the full sum at closing. Receiving the full purchase price creates funding for other personal or professional projects.

Financing terms

One commonly used method of financing is owner financing. With owner financing, the seller makes a down payment on the business and then pays the rest over time. The remainder could be paid back in several payments, which is also called an installment sale, or they could pay the balance back all at once.

As you can imagine, many sellers prefer to not engage in owner-financed deals. Such a deal brings with it the worry that the new owner will fail to pay off the remaining balance. If this happens, you could have a messy legal dispute on your hands. 

However, owner financing can provide certain benefits. For starters, it can allow you to spread out your income from the sale over several years, thus reducing your tax burden, as discussed previously. 

In addition, some owner-financed deals have clauses that make the amount of the future payouts contingent upon the future performance of the company. Thus, it creates the possibility for the seller to receive a higher-than-expected payout in the event the company performs well. Of course, this type of deal would only be attractive if you expect the new owner to be able to drive growth after taking over the business. 

Consulting agreements and employment contracts

Some sellers may wish to reap the financial benefits of selling their business while staying involved in its day-to-day operations. At the same time, some buyers can benefit from the seller staying involved beyond the traditional post-sale training period. 

When this is the case, the buyer and seller can implement consulting agreements or employment contracts. These agreements state that the seller will stay on board to run the company for a specified period of time or be available for consulting services. 

From the buyer’s perspective, they may wish to own the business but not be involved in the day-to-day operations. Or, the business may require a very specific skill set or knowledge base (regarding the target audience, for example) that only the seller has. 

From the seller’s perspective, they may love running the business and wish to stay involved in it but also desire a substantial payout due to their own personal financial situation. 

Of course, the seller would most likely be compensated for any services they provide. In addition, many consulting agreements or post-sale employment contracts include a holdback. A holdback is an amount of money that is withheld from the sale until the seller fulfills their agreed-upon consulting or employment obligations. 

“Legal issues can arise in the post-sale period when the buyer finds an issue with some aspect of the deal.”

Post-Sale Considerations When Selling Your Business: What Are the Legal Implications?

You have sold your business, received your payment, and are looking ahead to your next endeavor. The last thing you want—or expect—is to run into legal issues surrounding the sale of your company. For this reason, it is important to be aware of any potential legal issues ahead of time so that you can work to mitigate them proactively.

Legal issues after selling your business

Legal issues can arise in the post-sale period when the buyer finds an issue with some aspect of the deal. For example, perhaps they come across an issue with an asset that was included in the asset sale, or they discover a problem with the way the initial business valuation was conducted. 

Legal issues could also potentially arise from the way in which you carry out your post-sale training, consulting, or employment agreements. If the new owner feels you are not living up to the terms of the deal, they may raise concerns.

The importance of due diligence and building a healthy relationship with your buyer

The due-diligence period of the transaction process is designed to address many of these potential concerns. During due diligence, the buyer has the opportunity to comb through your business operations in order to ensure the business performs as advertised. 

It is your job as a seller to help facilitate a successful and thorough due-diligence process. Provide the buyer with all requested information, be transparent and honest, and fully disclose potential issues to them in a timely manner. 

In addition, you can help to mitigate legal issues by working to create a productive, trusting, and healthy professional relationship with the buyer. This should start from the beginning. By building rapport and trust, you lay the groundwork for any future issues to be worked out directly between you and the buyer, as opposed to resorting to costly litigation.

“Taking some time to consider how you will arrange your finances and personal life after letting your business go can be both exciting and intimidating.”

Personal Post-Sale Considerations When Selling Your Business

Whether you are selling a limited liability company, a corporation, or a sole proprietorship, your life will likely change after the deal has been finalized. In addition to preparing for the tax implications of the sale, working to structure the deal in your favor, and becoming informed of the legal implications, it is important to take some time to consider how the sale will impact your personal life. 

You may find yourself with excess free time, which could be a boon to some and a challenge to others. Your personal finances will likely also be quite different. While you may have a large balance in your bank account, you also won’t have the usual cash flow that you derived from the business. 

Taking some time to consider how you will arrange your finances and personal life after letting your business go can be both exciting and intimidating. By getting started earlier, you can work to ensure you make the most of your post-sale life.