Achieve Financial Freedom When Selling Your Business
You've spent years, decades even, building your company into a successful enterprise. But as you near retirement age, your business might be the most valuable asset you have, so naturally, selling this asset to achieve financial independence sounds like the most viable retirement option. You don't want to sell it, however, unless you feel confident that the outcome will put you where you need to be.
There are some crucial considerations that can have a profound impact on whether or not you'll achieve financial independence from the sale of your business. Without further ado, let's dive in!
What is Financial Independence?
Financial independence is the freedom to live your life unrestrained by the burden of needing to work to earn a paycheck. It can--and will--look different for everyone because we will all define our own version of financial independence. But, ultimately, it boils down to your individual goals and financial needs in post-retirement life.
You Need a Personalized Approach
While online calculators or “rule of thumb” strategies like the 4% rule can give you an idea of where you'd like to be, there is no real objective yardstick by which to measure a successful business sale. And these generic examples rarely account for high-net-worth clients anyway.
The "success" of your sale will rely entirely upon its ability to fund the lifestyle you envision having and the goals you want to meet.
Will your retirement cost more or less than your current lifestyle?
How will your expenses in retirement change?
What lifelong goals do you still wish to achieve with your wealth?
Map Out Your Retirement Vision
These are all very heavy questions, without a doubt, but ones we help business owners answer every day. This is why the first step of the process is working with your advisor to map out your retirement vision. Then, we can align your focus with your finances to see where we need to end up after the sale of the business has been finalized.
Decide How You Want to Transition the Business
You’ll have to decide if you want to (1) keep the business within the family, (2) sell to someone within the business, or (3) sell to an outside buyer.
For many business owners, this is usually one of the most difficult of the decisions to be made. It’s also the most personal. There are important factors to consider, such as:
- Do you want to maintain a role in the business after you retire? If so, in what capacity?
- Do you want to sell the whole business or parts of it?
- What does your business need from its next leader to continue to thrive?
- Is there an experienced person within the business who is qualified to take over?
Each of the above questions comes with a unique set of challenges and benefits. We’ll work with you to honestly evaluate each option will increase the likelihood you’ll be satisfied with the outcome.
Decide on a Number: Ordering a Business Valuation
One of the most common mistakes business owners make is miscalculating the value of their business. Of course, any business is only worth what someone is willing to pay for it, but consulting an expert can help you avoid over or underpricing. On the one hand, you won’t want to undervalue and miss out on possible profits; on the other hand, you won’t want to overvalue and have the business on the market for an extended period of time.
The best way to decide upon a price is to obtain a business valuation. These are routinely performed by accountants or business brokers who will assess the value of your business based on your target market, your revenue, expenses, cash flow, and average annual performance relative to that of your competitors.
Account for the Taxes
As with any other income source, taxes will be assessed on the income from the sale. Failing to structure the sale in a tax efficient manner could cost you a large chunk of your profit. Of course, the tax liabilities you incur will vary based upon (1) your business type (LLC, S-Corp, C-Corp, Partnership, or Sole Proprietorship) and (2) how you structure the sale.
If you run an LLC or Sole Proprietorship, you’ll be taxed capital gains on the profit one time and claim this income on your regular income tax form. If you run a C-Corp, you will pay capital gains taxes twice—once for the corporation and again for each shareholder in the company (divided equally amongst the shareholders). As an S-Corp or Partnership, each individual partner will pay for their portion of the income tax on their personal return and no corporate filing is required.
How you structure the sale will also affect the amount of taxes incurred. Some business owners will sell the company in its entirety in a single transaction, whereas others will sell large shares of their company to multiple buyers over time. Some business owners will even take payments from the new owner’s business revenue until the total selling price has been satisfied. Of course, there are a multitude of options and each garners distinctive tax responsibilities, so it's best to consult your financial advisor and CPA before you make any costly decisions.
Who Else Should Be Involved in the Process?
With so much at stake, your exit strategy deserves all hands on deck. There's no need to put yourself on an island as you sell your business. Tap into the resources and professionals who will help you achieve the successful outcome you've been working toward your entire career. The right team can support you through the transaction and provide expert guidance to a smooth exit transition.
1. A Business Broker
A business broker will assist in determining a competitive sales price for your business and connect you with potential buyers. Depending on the size and complexity of your business, you may want to consider working with a broker who specializes in your industry. These are definitely upsides to working with “a golden Rolodex” who can introduce you to the right people at the right time.
2. A Business Attorney
The business attorney will help create a purchase agreement and transfer of ownership, as well as manage the due diligence process and ensure the legal i's are dotted, and t's are crossed. Avoid unknown troubles down the road by bringing a knowledgeable business attorney into the fray.
3. An Accountant
An accountant can ensure the business's financial records are in order for the sale. They can also help advise on the tax implications so there aren’t any unforeseen surprises.
Working with a team of professionals who are all in communication and working with your best interest in mind limits miscommunication, oversight, or discrepancies in your plan. If you don't have your own team assembled, we can connect you with vetted professionals both in the Wilmington, DE area and virtually nationwide. And if you do, we are pretty easy to get along with and will work as part of your "dream money team" to make sure you get the most out of the sale of your business.
Let's Get Started
Selling your business is an exhilarating time! As exciting as it can be, though, knowing how to position your business, target the right buyer, and plan for financial independence can often feel like an impossible task. Having the right financial advisor and professional team in place can make all the difference.
Take the time for careful planning and preparation. Contact RiversEdge Advisors Entrepreneur Planning Group today. We're here to help every step of the way!