Category: Business Sale

Potential taxes can greatly affect the proceeds from selling your business. One way to reduce the tax burden is to perform an installment sale, especially if the buyer doesn’t have enough cash or will pay a contingent amount based on the company’s performance. Installment sales spread the gain over the contract’s duration, which may help avoid triggering the Net Investment Income Tax or short-term capital gains. However, there are drawbacks, such as the recapture of depreciation in the year of sale or higher tax rates in future years.

If you’re gifting your business to family members during your lifetime, you’ll need to file a gift-tax return. You can choose to pay an immediate gift tax or use your lifetime gift and estatetax exemption (currently $15 million). Unless the value of your business exceeds this exemption, you typically won’t owe any tax on the gift.

GIFT-TAX EXCLUSION

You have another option if you plan to eventually pass your business to a family successor, but the business’s value exceeds the exemption. You can use the annual gift-tax exclusion ($19,000 in 2026) to gradually give an ownership interest each year without incurring taxes.

SMART MOVE: Consider the entire picture when planning to sell your business. Tax consequences are only one of many important considerations.

Here are three ways business owners can turn younger family members into eventual company owners, short of buying the company with ready cash (with its various tax implications).

OWNER FINANCING

Also known as the installment plan, you might create an agreement with the help of an attorney to receive a down payment on the sale of your business, with the rest paid in installments.

Pros include potentially lower interest on payments for the buyer and a stream of income the seller can use in retirement. Cons include less cash flow for the new owner to operate the company and the chance installment payments to the previous owner will stop before full payment.

SINKING FUND

If you have a well-structured buy-sell plan and intend to pass the business on in a specified number of years, you might consider establishing a sinking fund, which becomes a company asset until used to purchase the business. You can schedule regular payments to an interest-bearing account or investment-type fund, with funds growing over time to theoretically fund a future purchase.

LIFE INSURANCE

You may also want to examine the potential of funding a cash value life insurance policy to use in the future purchase of the business. Like a sinking fund, the life insurance policy becomes a company asset. Unlike a sinking fund, which doesn’t help if the existing owner dies before the fund accumulates sufficient cash, life insurance covers a potential sale, whether unexpected or planned.

GET HELP

Work with your legal and tax professionals to better understand the tax implications for you and family successors before deciding which funding method to choose.

When business owners want to sell their companies to non-family purchasers, they have a number of ways to achieve this goal. First, get a current business valuation. Make sure your company’s books are in order, as well as contracts that involve future business and income.

INSIDE OR OUT?

If you have partners who want to remain in the business after you leave, work with an attorney to draft a buy-sell arrangement. Another way you might keep the business in familiar hands is to explore the use of an Employee Stock Option Plan. Your tax and legal professionals can provide the details for each approach.

Then, if you want to still sell your business on the open market, work with your tax and legal professionals to establish the optimal price and purchase agreement.