Selling Your Business? Why the Sale Price Is Only Half the Story

You've spent 30 years building your business.

You've put in the long hours, made difficult decisions, managed employees, and taken on the risks that come with owning a business.

Now you're thinking about selling.

And naturally, one of the biggest questions is:

"How much is my business worth?"

It's an important question. But there's another one I think deserves just as much attention:

"How much of the sale proceeds will I actually keep, when will I receive them, and what will I do with that money afterward?"

Because selling a business isn't simply about agreeing on a purchase price.

The way the transaction is structured can have a significant impact on your taxes, your retirement income, and your family's long-term financial plan.

A $6 Million Offer Doesn't Always Mean the Same Thing

Let's say you've built a successful business, and someone offers you $6 million to buy it.

Sounds great, right?

But there can be a big difference between a $6 million offer and having $6 million available to fund the next chapter of your life.

Consider three possible arrangements.

Option 1: An All-Cash Sale

With an all-cash sale, you receive the agreed-upon payment at closing, after applicable transaction adjustments and expenses.

The benefit is fairly straightforward: you have immediate access to the proceeds.

But that can also mean recognizing a significant taxable gain in a single year.

And depending on your situation, that may create additional planning considerations.

Option 2: An Installment Sale

Now suppose the buyer offers $3 million at closing, with the remaining $3 million paid over several years.

Under certain circumstances, an installment sale can spread some of the taxable gain across multiple tax years.

That may create opportunities for tax planning.

But there's a tradeoff.

You're now depending on the buyer to make those future payments.

What happens if the buyer runs into financial difficulties? What protections are included in the agreement?

And keep in mind, not every type of gain qualifies for installment-sale treatment.

So while spreading payments over time may sound appealing, you need to understand both the tax implications and the risks.

Option 3: An Earnout

The third possibility is an earnout.

Maybe the buyer offers $4 million at closing, with another $2 million payable if the business reaches certain financial targets over the next several years.

On paper, that's still a $6 million deal.

But the additional $2 million isn't guaranteed.

Depending on the agreement, you may also have to remain involved in the business to receive those payments.

So think about it this way.

Three buyers could offer the same $6 million purchase price and leave you with three very different financial outcomes.

That's why the structure of the sale deserves just as much attention as the headline number.

Understanding the Tax Implications of Selling a Business

For many business owners, selling their company may create one of the largest taxable events of their lifetime.

And how the transaction is structured can make a substantial difference.

One of the first questions is whether you're selling ownership interests in the company or whether the buyer is purchasing the underlying business assets.

These arrangements can receive different tax treatment.

Depending on the transaction, certain gains may qualify for long-term capital gains treatment, while other amounts may be taxed as ordinary income.

There may also be depreciation recapture, transaction expenses, state taxes, and other considerations.

The important thing is to understand the estimated after-tax proceeds, not simply the gross purchase price.

Could Selling Your Business Affect Medicare Premiums?

Here's something that can catch business owners by surprise.

If you're already enrolled in Medicare, a large taxable gain from selling your business could potentially increase your Medicare Part B and Part D premiums.

That's because Medicare uses a system called the Income-Related Monthly Adjustment Amount, or IRMAA.

These surcharges are generally based on your modified adjusted gross income from two years earlier.

So a significant taxable event today may affect your Medicare costs down the road.

The impact will depend on your individual circumstances, but it's one more reason to consider the sale as part of your broader financial plan.

What Happens When Your Business Is No Longer Your Primary Source of Income?

For years, your business may have been both your largest asset and your primary source of income.

You may have received a salary, business distributions, or both.

But once you sell, that changes.

Now you may have a substantial amount of money available, but you also need to figure out how that money will support your lifestyle going forward.

And that's an entirely different conversation.

How much should remain liquid?

How much needs to be invested for long-term growth?

How much income will you need each year?

How will you manage market risk?

What happens if you experience a major market decline shortly after selling the business?

And how do taxes affect the way you withdraw money from your investment accounts?

These questions are especially important for business owners who plan to retire or substantially reduce their involvement in the business after the sale.

The goal is to transition from business income to a sustainable financial plan that supports your next chapter.

Don't Overlook Estate and Charitable Planning

Selling a business can also create opportunities to revisit your estate plan.

Maybe you want to transfer some wealth to your children or grandchildren.

Maybe charitable giving is important to you.

Or perhaps you want to establish a longer-term family wealth transfer strategy.

Depending on the circumstances, certain gifts of business interests made before a transaction becomes binding may have different tax consequences than gifts made after the sale.

These decisions require careful coordination with your CPA and estate planning attorney.

The timing matters, and there are important legal and tax considerations that need to be evaluated before taking action.

Why Planning Should Begin Before You Sign a Letter of Intent

One of the biggest points I want business owners to understand is this:

The time to start planning for the sale of your business is before you sign a letter of intent, not after the money arrives.

Why?

Because once the major terms of a transaction have been agreed upon, your flexibility may become limited.

Before moving forward, you want to have a clearer understanding of the potential tax implications, the risks associated with future payments, the estate planning considerations, and how much money you'll actually need to support your long-term financial goals.

That often means bringing your financial advisor, CPA, and attorney into the conversation early.

Each professional looks at the transaction from a different perspective.

And when those different pieces are coordinated, you can make more informed decisions about the sale and what comes afterward.

The Bottom Line: It's About More Than the Purchase Price

If you've spent decades building a successful business, you've probably devoted an enormous amount of time and energy to making it valuable.

You should give just as much thought to how you leave it.

Because selling a business isn't simply a business decision.

It's a retirement decision, an investment decision, a tax decision, and often a family decision, all rolled into one.

The goal isn't simply to get the highest offer. It's to make sure the work you've put in over the years translates into the financial future you've been working toward.

If selling your business is something you're considering, even if it's several years away, it may be worth starting the planning conversation now.

At Caserta & de Jongh, LLC, we help individuals and business owners understand how financial decisions fit together, from investments and retirement income to taxes, insurance, and estate planning coordination.

For more financial education resources or to schedule a conversation, visit www.caserta-dejongh.com.

Registered Representative of, Securities and investment advisory services offered through Hornor, Townsend & Kent, LLC. Registered Investment Adviser. Member FINRA/SIPC.  800-873-7637, www.htk.com. HTK does not offer tax or legal advice.

Caserta & de Jongh, LLC is unaffiliated with HTK.

For Educational Purposes Only - Not to be relied upon as financial, tax, or legal advice. 

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