The sale of a small-to-medium-sized business is a momentous occasion in a Business Owner’s life; the end of a long journey capped off with a big payout, setting the stage for a graceful retirement. All those years of toil in growing and running a business culminated in a successful exit.
A perfect ending - right?
If only. There’s a catch. Most business owners are largely unaware of the nuances associated with selling their business. Unfortunately, Business Owners find out late in the process that there are a series of cash outlays tied to the sale including taxes and professional fees. Typical examples are summarized below:
Beyond taxes paid by the Business Owner, there are significant fees tied to professional services supporting the sale. Notably, these fees for services include legal, accounting/tax, and brokering-related costs. The largest of these fees is brokering success fees usually as a % of the sale price.
The table below highlights these costs.
As is evident, the taxes and fees can add up to a small fortune, leaving a Business Owner feeling unfulfilled after the sale, or “Seller’s Remorse”. Before the realities of these costs come into play, a Business Owner may incorrectly believe they receive all the proceeds from the sale and it’s off to the sunset. That would indeed be nice, but nothing is further from the truth.
Let’s use a simple example to illustrate how a small-to-medium-sized business (SMB) sale truly plays out. In our example below, we will use a $750,000 sale of a small business. A typical SMB sale can range roughly from $250,000 to $2.5 million, but our example will provide a relatively accurate picture of the net cash flow received by a Business Owner from a sale. An unsuspecting or uniformed Business Owner may not understand what the net impact of various cash outlays will add up to as he or she navigates a business exit.
Additionally, often, in small business sales, a Business Owner will accept as part of the selling price, some amount of seller financing. In our example above, 20% of the selling price is tied to Seller Financing. The buyer wants the departing Business Owner to have some “skin in the game” and it also may be the difference between getting the deal done or not after bank financing is considered.
Note: a more detailed description of this analysis is shown at the end of this article.
In the above example, a $750,000 sale price nets a Business Owner only $340,750 in cash, or 45% of the sale. This leads a Business Owner to feel “Seller’s Remorse”.
The tax amounts due from a sale are based on the financial basis of the seller’s books and other aspects, such as the agreed-upon asset classifications by the buyer and the seller, depreciation recapture, and other factors. The tax calculation is a complex process and requires a seasoned tax professional to prepare.
It is not uncommon for professional service fees to amount to 12-15% of the total selling price. Unlike the seller, these professionals do not get paid off over time. This cash outlay usually occurs before, or in the case of the business broker, at the closing.
Avoid Seller’s Remorse
The fee structure tied to business brokerage fees is where we see an opportunity for a Business Owner to save significant dollars. As noted, a traditional business broker will charge somewhere between 10%-12% of the selling price as their success fee. We believe Business Owners should consider a new model for selling their business, which can save them upwards of 50% or more on success fees. See our blog article Using an Exit Advisor to Sell Your Business.
This alternative approach will dramatically reduce the “Seller’s Remorse” sentiment commonly experienced by Business Owners as they navigate their exit journey.
We are happy to educate and inform business owners about the exit process. Feel free to reach out any time.
Detailed Cash Proceeds Overview