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“In this world, nothing can be said to be certain except death and taxes”, said Ben Franklin in 1789. That said, upon the sale of your business, you are probably going to incur long term capital gains taxes.
Long term capital gains taxes are generally lower than income tax rates, and the actual long term capital gains rate is predicated upon the rate that applies to your income. The long term rate applies to assets that have been held for over one year, which is almost always the case in the sale of a business.
The actual capital gain is calculated by taking the selling price of the business, subtracting disposal costs, and then subtracting your “basis” in the business. How basis is calculated can actually be quite complicated, and is beyond the scope of this article; on a basic level, however, it is simply the equity portion of the balance sheet. You should be aware that any debt that you have personally guaranteed is included in your basis the same as if you had made an equity contribution. Additionally, any depreciation that you have taken since you owned the business is now taxable as ordinary income at ordinary income rates, and not at capital gains rates. This is referred to in tax law land as the recapture provision.
Another important point is that when you sell a business, from a tax point of view, what is good for the buyer is bad for the seller, and vice-a-versa. Prior to closing, an allocation will be made between goodwill and fixed assets, with the fixed assets valued at fair market value. Goodwill must be depreciated over 15 years, while fixed assets such as machinery and equipment can be depreciated at a much faster rate, say five years. The seller is going to prefer that the greatest amount be allocated to goodwill since any value assigned to fixed assets over book value is taxed at ordinary income rates and not at capital gains rates. A buyer, however, is going to want as much as possible allocated to fixed assets since the faster depreciation allows for more immediate tax savings. Remember Finance 101 and the time value of money. What is allocated to fixed assets versus goodwill often becomes a negotiating point; bear in mind that the allocation should be done objectively, and the contract of purchase and sale will often stipulate that the allocation be made without consideration to the tax consequences or benefit to either buyer or seller.
This article is not intended to be a rendering of legal, accounting, tax or other professional advice. Assistance from a competent professional in these specific fields should be sought.
CROWN BUSINESS BROKERS, LLC
So who are we? We are a business brokerage firm located in Cranford, N.J., about 30 minutes from New York City. My name is Brad Palmer, Managing Member. I’m a N.J. Certified Public Accountant who likes to think that he is not boring and who has some semblance of a personality.
I got into the business brokerage business because several years ago I helped a client sell his business as a “favor”. I didn’t make a dime on it but it was fun. So I decided that the next deal that I put together I was going to get paid for. And that was the beginning of Crown Business Brokers, LLC
Like any other business today, business brokerage is a highly competitive field, and like any other business or profession, as regards practitioner quality, it includes the good, the bad and the ugly.
So what is the first thing you should look for in hiring a business broker? Besides ethics, which is obvious, I would say the most important thing is a strong financial background, as indicated by both education and previous employment. Sales skills are important, but not as important as tax, accounting and financial skills. No one buys a million dollar business based upon the personality of the broker.
The next most important thing is connections to the financial community. Your deal is not going to get done unless the buyer can procure financing. If a broker has connections to the financial community, and if s/he knows bankers who respect him or her, your deal is going to get done much faster.
At the moment, Crown Business Brokers, LLC is growing rapidly, and we have retained the services of Geoff Caplan, of Boca Raton, FL., to redo our website and to optimize it. Geoff is doing an excellent job, and the traffic to the site is increasing rapidly, which we hope will result in an increasing number of quality listings.
We are also looking for straight commission sales agents in the New York metropolitan area. So if you have a financial background, sales skills, and are used to selling on a straight commission basis, we would love to hear from you.