PEMBROKE, Mass. — Every so often, I get a call that goes something like this: “I’m about to sell my business and my accountant says I will owe $150,000 in taxes. How can I avoid paying such an outrageous amount?”
I realize that you’ve worked hard all your life and plotted and crimped to build up a solid equity base, something you can count on for retirement.
I also understand that you hope to obtain a large amount of money when you finally sell your business. Having said that, you also drew a comfortable salary for most of those years and afforded your family a decent lifestyle.
Along the way, there have been some ownership benefits. Your car paid for through the business? A petty cash account to spend at your discretion? Most of the restaurant meals you and your wife enjoy through the business?
So, you haven’t exactly been undercompensated all these years.
The thing to realize is, taxes are a fact of life. When it comes to money obligations, anything can happen, and it often does.
SELLER BEWARY
I have personal experience. In 1979, I sold a business for $350,000, to be paid $35,000 a year for 10 years.
I did this because the buyer had owned a successful business and had a lot of money in the bank. Furthermore, I didn’t need the money, and believed that the installment sale, offering lower tax liability, would be preferable.
I thought it would be a perfect fit. Except it wasn’t.
The employees didn’t take to the new owner. Mutiny occurred. Four key staffers quit. In retaliation, the new owner fired a few more staffers. Then trying to rebuild the business, he suffered an emotional collapse.
At that point, my options according the drawn-up contract were to take over the business, as is, or settle for a flat payment of $175,000. I chose the latter. Bingo — I lost half my gains.
Also, it is prudent to speak to your accountant before the sale.
Arnold Schaffer, CPA and an adviser to drycleaning organizations for 45 years, says, “Planning is important in selling a business. It can alter your bottom line. For instance, it might be better to wait until the following year, on Jan. 1, to do the sale. Or you could alter the allocation of assets, by working with the buyer. Still, there will be taxes to pay.”
Let’s say that this $1 million sale results in a tax liability of $250,000. That’s a lot of money. Receiving $750,000 is not as good as $1 million, but it is not chump change, either.
A reasonable person could manage fine on $750,000 for many years. Figuring 4% interest, a reasonable person could pull out $50,000 a year for 21 years. Most retirees receive Social Security, so that adds another $30,000 in total for him and her to the mix.
Any retiree who can’t manage on $80,000 a year ($50,000 plus $30,000) needs a better financial adviser. Or perhaps a therapist.
But if receiving a net benefit of $750,000 isn’t good enough, then keep working. Build the business up to where it’s worth $1.2 million, and then you’ll have more of what you want.
Or work four more years and build up your personal capital account. This isn’t the answer you want to hear, but this is the only reasonable response to those who shout, “Not enough.”
To those who protest that it is double-taxing, since you already paid taxes on your profit, I must point out that a good portion of your sale price is goodwill and no taxes have been paid on goodwill. Nor did you pay taxes on accumulated depreciation, because they were expenses. Anyway, many of the taxes you pay — sales, property, state, estate — is double taxation.
Finally, taxes help society. It’s not just money out the window. Taxes pay for good roads so customers can drive to your store easily and without much thought.
Also, taxes educate the young, maintain law and order, and help keep the food safe and the water drinkable. Taxes enables society to function. As a consumer, you also benefit from these aspects.
So, yes, you do have to pay a good percentage of the sale price when you sell your business. But, at the same time, you’ll do fine. And some of that is due to the fact that you live in a prosperous, well-taxed country.
To read Part 1, go HERE.
Have a question or comment? E-mail our editor Dave Davis at [email protected].