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The Best Ways to Cash Out of Your Business

The Best Ways to Cash Out of Your Business

It’s the thought in the back of your mind. Should you sell your business? Perhaps you are thinking about retirement, or you have the desire to start a brand new venture. It’s not as simple as handing over the keys to someone else, though. It’s important to balance both the emotional and the financial components to this process. What’s right for you and your goals isn’t right for another business owner. Take some time to consider the options available to you before making your move.

Establish Your Goals: What Do You Want to End Up With?

Prior to making any decision to sell your business, think about it. Not only are you making a life-changing decision, but it will impact your family, your income, and the business itself. You may be concerned about what will happen to the hard work you’ve put into it or how your loyal customers will feel about the process. At the same time, there may never be a “perfect” time to sell. That’s why it is so critical to define what your goals are in the process.

What do you need or want out of the business? You may need a specific dollar amount for your company. You may wish to sell to free up time. A good step here is to work with a financial team to give you an idea of what you can expect. A financial advisor and tax professional are the most important people to have by your side during this process. Analyze the current financial health of the company. Determine the tax implications of selling your company in various ways. And, discuss the expectations you have in walking away – timelines, costs, profits, and long-term decision-making concerns.

With this information, you can begin to make better financial decisions for your company. But, first, you need to consider the various ways to cash out your business. Your financial advisors can help you with this process as well.

Methods for Cashing Out Your Business

Business owners ready to sell their company need to make the right decision for their needs. However, there are several methods that you can sell, each with opportunities that may fit your goals better. Here are a few of the most common methods used for selling a business.

Sell to Family

It is possible to sell your business to family. Doing so should be a legal transaction with a comprehensive agreement outlined to include all elements of the transaction. In short, if you sell to your family, or plan to allow your loved ones to inherit the business, it must be a formal, legally binding agreement to ensure you no longer have a vested interest or financial obligation to the organization.

Sell to Employees

One method to consider is selling the company to the employees, and in some industries, this may be the best method to doing so. Commonly, this is done through an Employee Stock Ownership Plan, if you plan to sell to a group of employees. The ownership transfers to all qualified employees as a type of benefit. Employees receive a stake in the business as a part of their compensation. The shares are maintained within a trust until the employee leaves the organization. This fund is then used to pay for the sale of the business when you are ready.

Private Equity

Private equity could be another path to selling your business. A private equity firm is a common option because business owners often receive letters from such organizations hoping to buy the company. Don’t assume that is the best option. These firms raise money from other investors that end up in a fund. They provide capital to the business owner for partial ownership of the company. They expect a return on that investment or the sale of the company. Most often, these groups do not purchase 100 percent of the business. Instead, they are looking for a savvy earning opportunity from a well-managed company.

Strategic Partner Opportunities

Another way to gain capital for your business is to align yourself with strategic partners. These are groups that step in to provide the capital your business may need and benefit from either to grow or to achieve other goals. Business owners who are ready to scale, perhaps with a more hands-off method of managing their company, may find this opportunity to be ideal. These organizations are looking for businesses that are on the cusp of expansion, but need the capital and alliances to make it possible.

Installment Sales

What if you have a buyer that wants to purchase your company – perhaps someone that you would like to see do so – but they cannot make payment all at one time? An installment sale works much like any other property sale but rather than a lump sum payment, you receive payments over a period of time. If you sell in this manner, have a contract that’s rock solid. The gains you receive will be spread out, rather than all at once, which may make this a bit harder to manage if you need the funds right away. And, you will need to manage the taxation on this type of agreement as well.

How to Get Started on the Process

Selling a business isn’t simplistic and takes several steps to ensure it goes well. Key steps in the process include:

  • Timing the sale (often a year or two in advance)
  • Getting a valuation of the business by a professional appraiser
  • Determining if you will sell on your own or use a broker
  • Find your buyer
  • Prepare documents including all financial statements, tax returns for the last four years, and work with your accountant to finalize the process
  • Manage the profits to minimize taxes

Of course, there will be many steps in between this including negotiating the deal and finding a buyer that you feel has your company’s best interests at heart. All agreements, even those with family, must be in writing and clearly outline responsibilities and goals of the transaction. And, there’s also the need to ensure the transaction happens legally as well.

Frank Jenkins, CPA writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Frank Jenkins Jr

Frank Jenkins Jr

Frank Jenkins Jr. is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, accounting, audit & assurances. "I genuinely care about our clients because I have a personal connection with them. This job requires me to multi-task and work under tight deadlines. I get great professional satisfaction from balancing firm and client commitments while building a strong team here at AJC."

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