I Want to Sell My Company, What Should I Know and Do I Need to Consult My Accountant?

Are you thinking of selling your company? Making the decision to sell your company is never easy. After all, you most likely spent years building your business. However, if market conditions are right, you have an interested buyer, or it’s finally time to retire, selling can be a wise choice. Before you sign on the dotted line, it’s important to do your research, which might include consulting with an accountant.

In this article, we’ll cover everything you need to know about selling your company, including:

What preparation is needed.
The role of an accountant in the transaction.
Essential documents to prepare.
The tax and legal implications.
Common mistakes to avoid.

Remember, this article isn’t a substitute for professional advice. If you have any questions related to your specific situation, reach out to a qualified accountant.

Preparing to Sell Your Company

After you’ve made the decision to sell your company, there are a few different steps you need to take before you search for buyers or list your business. Below, we’ll break down the key steps to take before selling your business and how to calculate the rough value of your company.

Key Steps to Take Before Selling a Business

There isn’t a one-size-fits-all solution for preparing your business for a sale. In fact, the process can look wildly different depending on your industry and size. Nevertheless, here are four steps to take before selling a business:

Determine Your Goals: What do you intend to get out of the sale? Are you looking for funds to retire or want to ensure that employees are well cared for? Make a list of your priorities.
Build Your Team: Next, you want to build your team of professionals, including lawyers, accountants, and business brokers.
Organize Your Financials: Buyers will ask for historical financial and tax information. Before you list your business for sale is the ideal time to clean up your records.
Get a Valuation: Valuations are important in the initial stages of selling your business because they give you an estimate of what to expect.

Understanding the Value of Your Business

There are a handful of different ways to value your business. Certain valuation methods might be more suited for your company, depending on your industry. For example, book value might not be very effective if you don’t have a large amount of assets on your books. Here are six valuation methods, according to Harvard Business School:

Book Value: This method subtracts liabilities from assets.
Discounted Cash Flow: This is one of the most widely used valuation methods, which calculates the present value of future cash flows.
Market Capitalization: This method is used for publicly traded companies and assigns a valuation by multiplying the total number of shares by the current share price.
Enterprise Value: This method subtracts cash from debt and equity.
EBITDA: This method multiplies Earnings Before Interest, Taxes, Depreciation, and Amortization by an industry multiple to assign a value.
Present Value of Growing Perpetuity: If your business will experience rapid growth, this valuation method might be used, which divides the cost of capital minus the growth rate by cash flow.

Why Your Accountant Is Essential in the Sales Process

Business sales rely heavily on the financial health and profitability of your company. Many of the documents and reports prospective buyers review populate from your accounting system. This makes accountants indispensable professionals to have on your team when selling your company. Let’s go through the role of an accountant in business valuations and how they can help throughout the due diligence process.

The Role of an Accountant in Business Valuation

Accountants are a key component when it comes time to value your company. For one, accountants can provide independent calculations. Buyers are more likely to trust your assigned value when it’s prepared by a third party, like an accountant.

Additionally, accountants have a deep understanding of different valuation techniques. For example, an accountant understands which EBITDA multiplier to assign to your company based on the facts and industry standards.

Furthermore, accountants can also help you determine which valuation to use to support your business price. For example, book value and EBITDA can yield drastically different results. Selecting the right valuation technique helps you maximize your purchase price.

How an Accountant Can Help with Financial Due Diligence

Accountants also help with financial due diligence. Buyers will request information related to different aspects of your business. For example, a buyer might request a detailed accounts receivable aging schedule to determine the number of balances over 90 days. Your accountant can work with the buyer to answer all questions without giving them full access to your books.

In addition, your accountant can serve as a trusted advisor during the sale, helping you vet buyers. For example, you might choose one offer over another if the terms of the sale result in a more favorable tax situation. Having an accountant by your side to turn to with any questions is important to maximize compliance and create a favorable tax outcome.

Financial Documents You Need to Sell Your Company

Selling your company is a financial transaction, meaning you will be sending and receiving numerous financial documents. Let’s go through a few of the financial documents you’ll need and how to ensure their accuracy.

Organizing Profit and Loss Statements

A profit and loss statement outlines your profitability for a certain period of time. Buyers will generally request this report for the past three years. Before you send any reports, ensure your profit and loss statements are accurate by doing the following:

Categorize accounts in an understandable way.
Ensure financial data matches filed tax returns.
Complete reconciliations and verify data integrity.
Make adjusting entries for deferred revenue and other special considerations.

Since organizing this information can be time-intensive and requires extensive knowledge of Generally Accepted Accounting Principles, it’s best to pass it off to a qualified accountant.

Preparing Balance Sheets and Tax Returns

Like the profit and loss statement, buyers will also request balance sheets and tax returns. The balance sheet outlines your financial health, showing what you own and owe. Ensuring these numbers are accurate is important, as buyers will gauge your operations from this financial statement.

The tax return carries equal importance, showing the tax liability a buyer can expect. Past tax returns also demonstrate your compliance with Federal and state agencies, which is a major component of a buyer’s due diligence process.

Ensuring Accurate and Up-to-Date Financial Records

Ensuring accurate and up-to-date financial records is a great way to generate useful financial statements for buyers. If your records are behind or there seem to be inaccuracies in your financial documents, reach out to a qualified accountant. An accountant can not only help you catch up on your records but also ensure you are presenting the financial information of your company in the best way possible.

Tax & Legal Implications of Selling a Business

Selling your business almost always comes with tax and legal implications. After all, the IRS wants a portion of your profits, especially if you’ve taken business deductions over the years. In this section, we’ll cover how the sale of a business is taxed, capital gain and depreciation recapture considerations, and how to tell the difference between a stock and an asset sale.

How the Sale of a Business Is Taxed

Business sales aren’t taxed at your selling price. In fact, your taxable income may be much lower than the price you sell your business for. Like stocks and other assets, the taxable portion of your proceeds is based on your basis. Your basis is everything you’ve contributed, earned, and withdrawn over the years. Your tax basis will also include certain non-deductible and tax-exempt items.

Let’s say that your basis is $500,000, and you sell your company for $1,250,000. Subtracting your basis from the sale price results in a taxable income of $750,000. Closing costs, such as professional fees and commissions, can also be subtracted from the sale price to lower your taxable income. You will want to work with your accountant to maximize the number of proper deductions you can take from your taxable income. Your taxable income will then be subject to long-term capital gains tax rates if you have had the business for more than one year.

Understanding Depreciation Recapture

The taxability of your business sale can quickly become complex when you’ve depreciated assets. Let’s say that you’ve taken $250,000 in depreciation. At the time of sale, the IRS requires you to recapture this depreciation and pay taxes. Section 1245 and Section 1250 property are taxed at ordinary income tax rates. These sections cover most business assets, such as vehicles, machinery, office furniture, and equipment.

Asset Sale vs. Stock Sale: What’s the Difference?

There are two main types of business sale methods: asset and stock. An asset sale sells all of the business assets to the buyer, while a stock sale transfers ownership through stock. In an asset sale, you are required to transfer individual net assets at their fair market value, which makes it ideal for businesses with high levels of fixed assets or inventory. The buyer then benefits from a step-up in tax basis, allowing them to re-depreciate the assets. However, this method isn’t always advantageous for sellers, as they will face double taxation for assets sold.

In a stock sale, the cash paid for the equity interest goes straight to the shareholder, making it a less complex process for the seller. However, buyers don’t always like this method because they are not allowed to re-depreciate assets, which can result in a higher tax liability from no depreciation expense. To determine the best method for your company, consult with a tax accountant.

Tax-Optimized Strategies for Selling a Business

There are ways you can optimize your business sale to minimize your tax burden. One option is to complete a 1031 Exchange. A 1031 Exchange allows you to defer your taxes by purchasing a like-kind business within a certain timeframe. This option works well if you already have a new business you plan on purchasing.

Another option is an installment sale. Instead of receiving one large lump sum payment, you can spread the payments received from the buyer across multiple years. Not only can you earn extra income from interest, but you can also potentially lower your tax burden by unlocking a lower capital gain tax rate.

Common Mistakes to Avoid When Selling a Company

With any business sale, there are challenges that you’ll need to overcome. Here are two common mistakes to avoid when selling a company.

Overlooking Hidden Liabilities

Every transaction will come with liabilities. Instead of focusing solely on the sale price, take the time to look for hidden liabilities. For example, if the agreement has conditional earn-outs, what is the likelihood of reaching these items? If the possibility of doubling revenue to earn an additional $400,000 is low, you may want to negotiate your contract.

Not Addressing Potential Buyer Concerns in Financial Records

Buyers want full transparency in your accounting records. Too often, sellers are safeguarded and reluctant to answer these questions, which can leave buyers wary of moving forward with the deal. Throughout the process, take the time to address potential buyer concerns in your financial records. Even better, enlist the help of an accountant to converse with the buyer on your behalf.

The Benefits of Consulting Your Accountant

Throughout this entire article, we’ve touched on a few of the benefits of consulting with your accountant. Here are three more advantages of having this trusted expert on your team:

Identifying Tax Savings Opportunities: Accountants can help you determine your upcoming tax liability and find ways to save money, such as by doing a stock sale instead of an asset sale.
Ensuring Compliance with Financial Regulations: Business sales can be complex, with the IRS and state agencies laying out specific rules and regulations you must follow. Accountants are aware of these regulations, helping you maximize compliance and avoid receiving letters in the mail.
Streamlining the Transaction Process: Accountants can serve as an intermediary between you and potential buyers, helping facilitate the movement of financial documents and answering questions to keep the process moving forward.

Summary

Are you ready to sell your business? If so, it’s time to start building your team by adding a trusted accountant. Reach out to our team today to learn more about our business sale services.

Managing your finances can be overwhelming, but the right accountant can make it simple. Whether you need help with tax planning, bookkeeping, or business financials, a trusted professional can provide the guidance you need. Click here to connect with a qualified accountant and take the first step toward financial clarity today. Sources

Internal Revenue Service. “Publication 544 (2023), Sales and Other Dispositions of Assets.” Internal Revenue Service, 9 Sept 2024, https://www.irs.gov/publications/p544#en_US_2022_publink100072558.

Internal Revenue Service. “Topic no. 409, Capital gains and losses.” Internal Revenue Service, 16 Oct 2024, https://www.irs.gov/taxtopics/tc409.

Misamore, Brian. “How To Value A Company: 6 Methods and Examples.” Harvard Business School, 21 Apr 2017, https://online.hbs.edu/blog/post/how-to-value-a-company.