How to make a plan to sell your private business

See 6 tax and retirement tips to consider when selling your business.

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Key takeaways

  • Business owners should develop an exit strategy years before they want or need to sell.
  • A professional valuation is the foundation of your plan to sell your business.
  • Consider whether you have an internal successor or if you'll need to find outside buyers.
  • Consult with your tax and financial advisors on managing the proceeds from the sale.

When you’ve spent years running a business, it can be difficult to take a step back and view that company in the context of your overall financial plan. But all business owners will have to step aside someday—whether by choice or by necessity. At that point, you’ll want to ensure that you and your family receive the maximum benefit from your years of hard work.

"To realize the full value of this asset, you have to do some advanced planning around your own retirement needs and the legacy you want to leave," says Nathaniel Arnett, Director, Advanced Planning at Fidelity Investments.

Many business owners put off this kind of planning. In fact, one survey found that only 17% of business owners had an exit plan in place.1 But it’s critical to think through your options years before you want or need to walk away so you put the pieces in place for your preferred exit strategy.

Here are 6 suggestions to help you start planning for the eventual sale of your business—and for what comes next.

Get realistic about your company’s value

Business owners are often surprised by what their businesses are really worth. Some underestimate how much a buyer may be willing to pay for a turn-key operation with consistent revenue, like a successful vehicle service/repair shop, says Arnett. But many overestimate their company’s value, particularly professional services firms that are tied closely to the founder’s skills and client relationships.

That’s why the first step in any planning is to get an independent business appraisal. Look for professionals with accreditations such as:

  • Certified Business Appraiser (CBA) from the Institute of Business Appraisers
  • Accredited in Business Valuation (ABV) from the American Institute of Certified Public Accountants

Having a realistic estimate of your company’s value helps you determine if it’s enough to support your retirement needs and legacy goals. If the value is lower than you expected, you can develop strategies to grow the business to help boost its valuation before you sell, focus on building assets in other areas, such as your retirement accounts, or reduce expenses so you can save more.

Determine who’s next in line

You might already have a successor in place, such as a family member, business partner, or key employee. But this type of business transfer typically involves several years of preparation, which is best accomplished through a formal succession plan

For example, if you intend to sell your stake in the business to current partners, you should create a formal buy/sell agreement that outlines how that transfer will take place and how the other owners will pay you or your surviving heirs.

If you don’t have an internal successor, make a plan to market your business

If you don’t want to juggle your buyer search with your management duties, consider hiring a business broker. They can help develop a strategy for marketing your business, screen potential buyers to find a good fit, and negotiate the sale. In exchange, expect to pay the broker about 10% of the sale price, which will reduce the amount you walk away with and may require you to reconfigure your savings or retirement plans to close the gap. 

If you pursue this route, look for accredited professionals such as:

  • Certified Business Intermediary (CBI) from the International Business Brokers Association
  • Merger & Acquisition Master Intermediary (M&AMI) from M&A Source

Also remember that buyers will want to look under the hood of your business by scrutinizing its tax returns, income statement, and balance sheet. If you don’t have clean, organized books, work with your business accountant to get those reports in order before you embark on a potential sale.

Consider how you want to get paid

There are countless ways to structure a business sale, and the options come with important implications for your finances and lifestyle. You might prefer receiving a lump-sum payment, so you can make a clean break from the business—but many buyers won’t have enough cash on hand to pay in full. That said, you might prefer to offer seller financing or an installment plan, or even stay on as a consultant, so you can receive an income stream to replace your paycheck.

Also consider whether you can retain some of your company’s assets for your own financial needs. For example, you might be able to sell the operating business but retain the real estate and provide a long-term lease to the new owners.

"Any of these options can be built into an agreement, but you have to go into the negotiations clear about what works best for you," says Arnett.

Remember the tax implications

A successful business can be a large, appreciated asset, so expect a tax bill after the sale. How much you’ll owe depends on how you structure the deal, so work with a tax advisor during your exit planning process to examine the implications of different options.

"The type of assets being sold, and how much of the purchase price is allocated to each asset, may play an important role in determining your tax burden," says Arnett. For example, the portion of the sale price allocated to capital assets, such as business equipment or machinery, will typically be taxed at capital gains rates, while the portion of the sale price allocated to certain intangible assets may be taxed as ordinary income.

The timing of the receipt of the sale price may also determine your overall tax burden, says Arnett. "Receiving a one-time payment will result in large tax bill in the year you complete the sale, while selling the business on an installment basis may allow you to spread that tax burden over time."

Be smart about using the proceeds

Exit planning should also include a strategy for making the most of the money you receive. Consult your financial advisor on putting the proceeds to work in a diversified portfolio that supports your retirement needs. Lastly, remember to update your estate planning strategy to help ensure that the value you created by growing a business can support your family for generations to come.

Next steps to consider

Work with us to review your retirement strategy.

Get started on your estate planning process today.

Explore strategies to help reduce taxes on income, investments, savings, and more.

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