“Selling my business costs money?”
Unfortunately, it’s true - even selling your business costs money.
So - what do you have to spend money on when selling a business?
We have created a list of the costs that come along with selling so that you know what to expect and how to manage them.
5 Costs Associated With Selling Your Business
Sellers typically encounter the following fees as they go through the sales process:
4. M&A Advisor
1. Accountant Fees
As you prepare for the sale and even during due diligence, your financials will take a leading role. Your CPA or other accounting professionals are often included in the process.
Depending on the quality of your recordkeeping and the work you’ve done to prepare the business ahead of time, you may not need to include your accountant for much throughout the process.
This means you can save yourself some fees during the sale by keeping accurate and organized financials.
So, what do accurate and organized financials look like?
Start by making sure your P&Ls match your tax returns. The closer the better. Next, the more detailed your P&L can show on the income, cost of goods, and expenses of your company the more attractive it will be to investors.
Finally, keeping an accurate balance sheet, particularly as it relates to your inventory, will make your life easier at closing.
MIDSTREET TIPAccountant fees during the M&A process will generally stay between $0 and $5,000.
2. Attorney Fees
Attorneys are critically important to the sale process. You may have an attorney you’ve used for years, but they’re not always the best option when looking for representation. You need someone with experience in mergers and acquisitions.
If they do have M&A experience, they will be able to help you review any documents related to the deal and provide you with trustworthy legal advice.
Ask your broker for an attorney recommendation if your current attorney doesn’t have transaction experience.
Attorney fees can range from $7,500 to $50,000+. The fees will vary depending on the size of your business sale and the attorney’s involvement in the process.
Generally, the number of legal fees will scale up with the size of the transaction due to the increased complexity.
3. Merger & Acquisition Firm Fees
When you choose to sell your business, you will typically enlist the help of a merger and acquisition (M&A) advisor.
All M&A firms charge differently, but here is a summary of the fees you might see:
- Upfront fees - These are non-refundable fees an M&A firm charges for its services. The advisor will receive this fee whether they successfully sell your business or not.
- Monthly fees - Some brokers will charge recurring monthly fees for their services.
- Success fees - This is a fee M&A advisors receive only after the successful sale of your company. It will typically be based on a scaling percentage like the Modern Lehman scale.
However, some M&A firms will only charge a success fee instead of any upfront fees or retainers. To learn more about M&A fees, check out our blog on “The Fees Business Brokers Charge.”
Interested in calculating a success fee?
Download our Success Fee Calculator below!
When you sell a business, you will likely be receiving a gain on the sale of assets/stock. Any gain/profit is therefore taxable. How much you will pay in tax will depend on three factors:
- The type of sale
- Your tax bracket
- Your corporate entity
You should ask your CPA:
- How will the structure of my corporation (C-corp or S-Corp) affect the sale of my company?
- What type of sale (Asset or Stock Sale) would you suggest to minimize taxes/ avoid double taxation?
- How will my tax bracket affect how I am taxed in the sale of my business?
In our blog “What is an Asset Sale?” we reference how you may be subject to double taxation if you’re a C-corp because you can be taxed when you sell the assets to your buyer (corporate income tax) and taxed again when you receive the proceeds from the sale (personal income tax).
There are too many tax scenarios for us to cover all of them in this blog, so keep these points in mind when you talk to your CPA and broker about the best way to handle taxes for the sale of your business.
5. Miscellaneous Fees
Depending on what you are including in your sale and your type of business, these fees can come up as well:
- Appraisal - If you’re selling real estate with your business, you may consider ordering an appraisal before selling.
- Transfer taxes - If you’re selling your business’s real estate, you will also pay transfer taxes on the sale.
- Franchise transfer fees - If your company is part of a franchise, you may need to pay transfer fees as outlined in your Franchise Agreement.
- Safety inspection and associated fees - The buyer may request a safety inspection of your facility and it may uncover issues you need to fix prior to closing.
- Deposits from customers - If you’ve received deposits from customers for work the buyer will be expected to perform, you will need to prepare to leave those deposits for the buyer.
4 Ways to Decrease The Amount it Costs to Sell Your Business
1. Use the 1031 Exchange
If you’re selling real estate as a portion of the sale of your business, you can reduce the amount you spend on taxes with a 1031 exchange.
This exchange will prevent you from having to pay taxes on the profit you make when selling your company’s real estate.
However, the program does require you to take those gains and reinvest them into property used for business. If you plan on taking advantage of the 1031 exchange, you will need to know what type of business real estate you want to invest in.
To learn more about this, check out our blog on the “1031 Exchange When Selling a Business.”
2. Don’t Draw Out the Process
The faster the process of selling your business goes, the better. The longer it takes, the more the costs increase and the more money you will have to spend on advisors.
You can cut down on how long it takes by preparing ahead of time and making sure:
- Your financials are in order
- You are ready for due diligence
- You respond quickly during due diligence
These things can help speed up the process of due diligence, especially if you have to do a “quality of earnings.” A quality of earnings is a deeper look at your financials (an audit) that is requested by the buyer. They’re typically performed by a large accounting firm during due diligence.
3. Maximize the Value of Your Business
To maximize the value you receive for your business, list with a business broker and aim to sell your business at the right time.
It’s a hard fact to face, but you should sell your business when it is doing its best. If you sell when your company’s earnings are down, you risk not selling your business for its true value.
If possible, you should sell your business when the economy is doing well. That will generally ensure M&A activity in the market is strong and you’re able to attract multiple interested parties.
However, waiting to sell is not always possible - owners sell for many reasons. Regardless of when you choose to sell, you will want to work with an experienced business broker to get the best value for your business.
4. Structure Your Taxes Well
It’s important your broker, attorney, and accountant (your deal team) all have a detailed understanding of purchase price allocation in the sale of a business.
If you have a knowledgeable accountant and tax attorney, you can be assured your taxes will be handled properly for your sale. Each sale will need different structuring based on the type of sale and the company structure.
By taking these things into consideration, your attorney, accountant, and broker can ensure you are not taxed disproportionately on the sale of your business.
NOTEA C-corp can be subjected to double taxation if the deal is not structured properly.
Understand the Costs of Selling Your Business Ahead of Time
Although the idea of spending money to sell your business can sound deflating, you are one step ahead of the game now.
Now that you know what fees are associated with selling, you will be able to plan ahead for them and choose your deal team carefully.
A great broker and tax attorney will be able to advise you on how to structure your deal to reduce costs.