When you decide that you want to sell your small business in Lubbock, there are many questions that you will face. Some of these questions include: what types of buyers are there? Who am I going to sell my small business in Lubbock to? What taxes will I owe?
Types of Buyers
Buyers are generally classified into two categories: financial buyers and strategic buyers.
Financial buyers are groups like private equity funds that purchase businesses with a view toward earning a return on their investment over a finite holding period. While financial buyers may have specific plans for making the business run more efficiently and profitably, they are generally not anticipating significant revenue synergies or expense savings from wholesale changes to the business. When you ask yourself, “who should I sell my small business to in Lubbock,” financial buyers can be a great resource.
Strategic buyers are competitors, customers, or suppliers of the business who have a strategic goal for making the acquisition. Such buyers certainly want to earn a return on their investment, but that return is expected to come from combining the target’s operations with their own, rather than through financial engineering. In other words, strategic buyers look to long-term value creation through assimilating the target into their existing business, not a short-term return from buying low and selling high. Strategic buyers may anticipate revenue synergies through the combination or may foresee the opportunity to eliminate operating expenses in either the acquired or legacy businesses to fuel cash flow growth.
When you ask yourself the big question of “how to sell my small business in Lubbock,” you must first distinguish between financial and strategic buyers. This is important for evaluating unsolicited offers, but we suspect that a more important distinction is that between motivated buyers and opportunistic buyers. Successful family businesses in Lubbock will attract motivated buyers who have the capacity to pay an attractive price for the business, but should strive to avoid opportunistic buyers who are seeking to take advantage of some temporary market dislocation or cyclical weakness to get the business at a depressed price.
Who Should I Sell My Small Business in Lubbock To?
There are many options to sell your small business, but we will concentrate on the top two possible buyers: employees and family members. However, for purposes of this discussion, we will focus on selling the small business to an employee.
If you decide to sell your small business in Lubbock to an employee, the first thing to think about is the kind of employee who can and should take over leadership and ownership. You’re entrusting your business and its future to this person or group of people. We suggest that a “key employee” may be a good candidate to purchase the small business in Lubbock. Key employees are those who have a direct and significant impact on business value, meaningfully participate in the business’s strategic future, and whose combination of skills and experience would be exceedingly difficult to replace.
If you have some time to complete a transfer, a key employee might be a good option. Often, an owner must stay active in (or at least in control of) the company for five or ten years after the sale process begins in order to complete a successful transfer and attain financial security. In these years, owners hire and groom employees who not only want to be owners but also have the ability to assume ownership.
If your small business in Lubbock has a business value today that you think is too low, you may also be considering a sale to a key employee. Taking more time to transition ownership to one or more key employees may also give you more time to grow business value and capture profits.
What Taxes Will I Owe When Selling My Small Business?
When you ask yourself the big question of “how to sell my small business in Lubbock,” you may be considering the tax implications that go along with it. When selling the small business to a non-family member, the seller must be aware of two types of sales: stock sales and asset sales.
- Stock Sale: A stock sale is what sellers generally think of first. Sell the stock in the company, pay capital gains tax, and the buyer assumes the seller’s contracts, rights, and so on, without assignment.
- Asset Sale: Selling price starts out the same as a stock sale; however, the buyer is buying the assets of the company rather than the stock. The buyer receives a “step-up basis in assets” and can depreciate the assets all over again (avoiding future taxes). The seller pays ordinary income tax (much higher) and avoids liabilities with the transfer.
For small family businesses in Lubbock, nearly all business owners desire to provide financially for their heirs. As a result, one of the most common concerns such owners cite is the ability to transfer ownership of the family business to the next generation in the most tax-efficient way. Small business owners in Lubbock can take advantage of estate tax laws, which are in place to preserve family wealth. Most people believe that taxes only protect the wealthy, but that is just not true. Estate taxes (and taxes in general) are written in a way to motivate owners who want to sell their small businesses in Lubbock in a tax-efficient way.
The Internal Revenue Service defines the estate tax as follows: “The estate tax is a tax on your right to transfer property at your death.” The amount of tax is calculated with reference to the decedent’s gross estate, which is the sum of the fair market value of the decedent’s assets less certain deductions for mortgages/debts, the value of property passing to a spouse or charity, and the costs of administering the estate.
Attorneys who specialize in estate taxes have devised numerous strategies for helping families manage estate tax obligations when they decide to sell their small business in Lubbock. Strategies range from relatively simple, such as a program of regular gifts to family members, to complex, such as the use of specialized trusts. While the finer points of various potential strategies is beyond the scope of this article, the concept of fair market value is essential to understanding and evaluating any estate planning strategy.
Fair market value is the standard of value for measuring the decedent’s estate, and therefore, the estate tax due. The IRS’s estate tax regulations define fair market value as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” The great thing about fair market value for estate tax purposes is the small business owner in Lubbock can sell or transfer their interest in the business using business valuation discounts (discount for control and discount for lack of marketability). These discounts on the business valuation have large impacts on the gross estate, which directly benefit the recipients.
When you ask yourself the question, “how to sell my small business in Lubbock,” consider the different types of buyers, which include financial and strategic buyers as well as employees and family members. Be aware of the tax implications that go along with selling to a 3rd party as well as the tax benefits that can be taken advantage of through proper family estate tax planning when selling to a family member.
