Finance: Plan for sale well in advance
A. One of the benefits of owning your own business is the option of how you are established for tax purposes. As examples, you can be a partnership, sole proprietorship, LLC, Sub S, or Sub C. The choice is made according to how you can pay the least amount of taxes both individually and as a business.
Over the many years you own the business, your accountant is likely to advise you on how to claim as many expenses as possible. There are items that as an individual you cannot claim as an expense, but your business can claim as an expense. This is another advantage of owning your own business.
When you are ready to sell the business, the purchaser is going to pay for your equipment, fixtures, inventory, building and other assets. They will likely be paying you what is referred to as “good will” or “blue sky.” This is a name given to the concept that the purchaser should pay more because you have an ongoing business that has shown to be profitable. In many business sales, the amount of “good will” or “blue sky” is equal to the amount of profit a business has made for the last three to five years.
The ideal situation for selling your business is that you make the decision well in advance of the time the business is for sale. You should also be talking with your accountant about how the sale is going to be structured. How the price of the business is stated, with regard to the individual items the purchaser is buying and how much they are paying will greatly affect the amount of taxes you pay.
Tom Shay is principal of Profits Plus Solutions. Reach him at email@example.com or 727-464-2182.