Business Sales and Mergers in 2018 Break Records: 5 Tips for Business Owners Considering Retirement
Business mergers and sales were record-breaking in 2018. In the first half alone, more than $2.5 trillion in mergers were announced. This was seen in large corporations as well as small businesses. Due to some of the factors driving the trend, we will very likely continue to see many small business sales and mergers in 2019 as well. Small business owners considering selling soon should take some steps to make the transition successfully.
One of the biggest factors driving business sales is simply that many small business owners are ready to retire. Combined with a strong economy and low interest rates, 2018 was a great year for many small business owners to sell. For the most part, many of these same factors will continue into 2019. I worked with a number of small business owners selling (and buying) in the past year and have put together the following list of tips for a retiring small business owner to consider.
Tip #1: Plan Ahead and Plan to Sell
The most successful business sales we saw in 2018 were the ones where the business owner took a year or more planning an exit. In some cases the planned exit is not the one they took, but the effort still paid off. You never know when the right opportunity will come up, and you want to be ready when it does.
Still, some small business owners are simply content to retire and close up shop. I would encourage all small business owners to always explore the possibility of a sale first. For some businesses, this might mean hiring an employee as an eventual successor. Of course, this will take a few more years, but in the long run it could mean thousands of dollars in your pocket.
Tip #2: Keep Good Records
Potential buyers will want to review past financial records and company performance. Small business owners should not wait until just before they are ready to sell the business to get their books in order. In the year or two before the sale especially, you want to have good financial records. This is also a time to pull non-business or non-essential items from the company's balance sheet (i.e. investment real estate, personal vehicle). You also want to focus on controlling expenses so the business has a profitable history.
Tip #3: Find Advisers You Trust
If you don't already have a solid team of advisers, now is the time to start putting that together. Typically, you want to have an attorney experienced in business transactions and an accountant. Your attorney and accountant can work together to make sure you are receiving the best tax treatment for your sale. You should also consider how you will use the proceeds of the sale, so you might need to work with a financial adviser as well. Small business owners looking for outside buyers should also consider using a reputable business broker for the greatest amount of exposure.
Tip #4: Consider Tax Consequences
Small business owners looking to sell often have a big tax implication upon sale. In many cases, assets may be fully depreciated or the business owner's basis in the company may be relatively low. The gain on the sale of the business can generally be spread out over a number of years by selling on an installment basis. However, this only works for certain capital assets and the sale of company stock. It also comes with the risk that the buyer experiences financial hardship after the sale and is not able to make the payments. Another method Sellers can use to minimize the tax impact is the utilization of a charitable remainder trust.
By establishing a charitable remainder trust, the retiring small business owner can transfer company stock or assets to the trust and have the trust sell the asset. Since the charitable remainder trust is an exempt entity, it pays no tax upon the sale. Instead, the business owner receives income from the charitable remainder trust every year and then pays tax only on the income received. The benefit is that the sale price is paid all at once but the tax is stretched out over a number of years. When done properly, a charitable remainder trust can be a very powerful tool for retiring small business owners.
Tip #5: Get it in Writing and Get it Signed
There is often a lot of back-and-forth between buyer and seller when negotiating the transaction. You should not assume anything is enforceable or agreed upon unless it is in writing and signed by both parties. After putting in all the effort to prepare your business for sale and find a buyer, do not make the mistake of proceeding without a written agreement and experienced counsel.
My final bit of advice is that small business owners think about what's next. After the business is sold you need a plan for how you will spend your time and energy. There are many organizations that need volunteers or even staff with executive experience. You will also want to review your estate plan and be sure it is updated to reflect your new situation.
Interested in learning more? Send me an email at email@example.com or call the office at (507) 288-5567 to schedule an appointment.