Selling Your Business? How You Receive the Money Matters.
By Brian Wheeler, Director of Wealth Management & Business Brokerage
If you’re preparing to sell a business that you’ve spent 20 or 30 years building, you’re probably spending a lot of time thinking about one number: the sale price.
That’s understandable. But I’ve found that there is another number that deserves almost as much attention.
The Number That Matters After the Sale Price
How much of the sale price will you actually keep?
Consider an owner who sells a business for several million dollars with very little remaining tax basis. Receiving all of those proceeds in one year could create a significant taxable gain. You may have negotiated a great price for your business, only to discover that how you receive the money has a significant impact on what ultimately stays in your pocket.
Spreading Payments May Spread the Tax Impact
That’s where a Structured Installment Sale can become interesting.
Instead of receiving the entire purchase price at closing, a seller may be able to take the cash they need today and structure the balance into payments over 10, 15 or 20 years. If properly designed under the installment-sale rules of IRC Section 453, the taxable gain associated with those future payments may also be recognized over time rather than entirely in the year of sale.
Think about that for a moment. If you don’t need all of the money today, does it make sense to potentially pay tax on all of the gain today?
You May Not Have to Finance the Buyer
There is another part of this strategy that I find equally compelling. A business owner might hear “installment sale” and immediately think, I don’t want to finance the buyer for the next 15 years. I wouldn’t blame them.
That’s not what we’re talking about.
With a properly structured arrangement, the buyer can fund the applicable purchase price at closing and move on with the business. The structured portion is then used to fund the seller’s future payment stream. The seller isn’t relying on the new owner to successfully operate the company for the next decade or two in order to make those payments.
For someone approaching retirement, that can be an interesting combination: liquidity today, predictable income tomorrow, potential tax benefits over time, and less exposure to the future financial condition of the buyer.
Of course, this isn’t the right answer for every business owner or every sale. There are specific tax and legal requirements, and your CPA and other advisors should be involved in determining whether the strategy makes sense.
There is also one very important catch.
Timing Is Critical
You need to have this conversation before the sale closes.
The buyer needs to participate in the arrangement, and the structure generally needs to be established before you take possession of the proceeds. If the money has already landed in your bank account, you’ve likely lost the opportunity to go back and restructure how you received it.
So, if a business sale may be somewhere in your future, I’d encourage you to think beyond simply asking, “What can I sell my business for?”
Questions to Ask Before You Close
Ask a few more questions.
How much cash do I really need at closing?
Could spreading some of the gain over time improve my tax picture?
And if I want income from my business sale for the next 10 or 20 years, do I really want to depend on the buyer to provide it?
Selling your business isn’t just about getting the highest price. It’s about what happens to that money after the business you’ve spent a lifetime building is no longer yours.
If you’re thinking about selling in the next few years—or already have a buyer at the table—let’s have the conversation before you close. There may be opportunities available today that won’t be available after the transaction is complete.
Structured installment sales involve legal, tax and financial considerations and may not be appropriate for every transaction. Installment-sale tax treatment is subject to applicable requirements under IRC Section 453. Business owners should consult with their tax and legal advisors before implementing any strategy.