One of These Transactions is Not Like the Other
How Selling Your Company is Different Than Selling Your Home
As human beings when we are presented with a new concept, for which we have no experience, we look to associate the new concept with something from our past. In the case of the sale of a business, owners often look to a sale of another large asset that they may have experienced in their lifetime– the sale of their home or a vacation property. In fact, the sale of a privately-held business differs from the sale of a home in many ways.
#1 – Valuation & Buyers:
Home sale values are based on the comparable sales method for neighboring homes that resemble the house being sold. This analogy is only partially true for trying to compare the sale of a business. While other companies like yours that have sold in the past is some indicator of what your business may be worth, there are large differences between a static, free-standing structure such as a home versus a dynamic, ever-changing entity such as a privately-held business. Moreover, the value of a home is not dependent upon who the buyer is. In the world of residential real estate, all buyers are [essentially] equal – they are either qualified for financing or they are not. In the world of business sales, the type of buyer that you are talking to is critically important. Different buyers bring different attributes to the business sale. Some will pay more than others, and some will have to pay you out over time, i.e. not all cash at the closing. For example, a competitor may pay more for your business than, say an employee who you would like to see own the business but does not have any money for the purchase. That employee would need to pay you from future cash flows and the idea of getting a higher value can be tough. This leads us to difference #2.
#2 – Deal Structuring:
When a homeowner sells their home, they get paid the negotiated selling price at the closing. In business sale transactions, the amount of money received at the closing often represents only a portion of the total proceeds that are part of a larger negotiated selling price. Generally, smaller deals (less than a few million dollars) are subject to more ‘structuring’ of payments over time, while larger deals tend to get more cash at closing. That being said, if a large company is, for example, highly dependent upon an owner, then there may be a larger earn-out or payment associated with the sale.
#3 – Taxes:
When you sell a home, there is [generally] one tax rate, and sometimes no tax liability at all. When you exit a business, there are an endless number of potential tax outcomes. The most easily recognized tax rate for a sale transaction is the capital gains tax rate. This rate applies to the gain - the amount of value exceeding the cost basis of the stock – that is realized in the sale of shares of the company. But not all business sales are ‘stock’ deals. Rather, many are ‘asset’ deals that fall into a separate category and allocation process to determine the appropriate tax rates. Payments to an exiting business owner under an asset deal can have a variety of tax consequences that will impact what an owner will net from the transaction.
#4 – Transaction Types:
The sale of a residential home includes all of the property and the structure(s) that are on that property. Therefore, residential home sales are an ‘all or nothing’ deal. Business sale transactions come in a variety of different forms, with owners able to sell all or only a portion of the company’s stock. Could you imagine a home sale that included only a few bedrooms and a garage, for example?
#5 – The Impact on Others:
The greatest difference between selling a business versus selling a home is the impact that the change in control has on other people. When an owner sells or transitions a company to a new owner, many people are impacted including employees, customers, vendors, the local economy, as well as the owner’s family. So, while the sale of a home is an important event, it will not have as a dramatic impact on so many constituents.
Planning in Advance
There are certainly more than five differences between selling a business versus selling a home. So, when considering a business sale, make sure you hire a qualified exit planner well in advance of the event. Your needs and desires are unique, and exit planning is a customized approach designed to ensure those needs and desires are met efficiently. Exit planning is also the best way to match your expectations with reality.
Contact us today.
Article provided courtesy of Pinnacle Equity Solutions © 2016, not an affiliate of Lincoln Financial Advisors
Member – The Business Intelligence Institute*
*Business Intelligence Institute is a group associated within Lincoln Financial Advisors Corp. that focuses on business succession strategies.
Jeff Janes is a registered representative of Lincoln Financial Advisors Corp.
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