Editor’s note: This is the fourth in a five-part series.
You have decided to sell your business and have located a potential buyer. What are your options in terms of maximizing the amount of your sale from your real estate business?
If you do nothing else before you sell your business, the most important step you can take is to review the tax consequences with your tax attorney or your accountant. When it comes to selling, everyone’s situation is different.
For example, if you decide to sell your business and your house in the same year, you may end up paying a hefty amount in additional taxes.
On the other hand, you may have a buyer who is unable to pay all cash for your business. At this point, you may have to consider financing the deal yourself. Here are some of the most common models for selling your real estate business:
1. All cash upfront — you exit the business upon sale
While asking for all cash upfront may seem like a good idea, it may severely limit the number of potential buyers for your business. This in turn could result in a lower price. Tax consequences are another issue. Taking all your money upfront may result in you keeping less due to higher taxes. A specific issue to watch for is the Alternative Minimum Tax.
Many of your typical deductions disappear as you hit certain income levels. Again, see your tax professional first to minimize the tax bite.
2. Installment sale with a fixed price — you may exit or phase out of the business
In most cases, there are usually some serious tax advantages to taking an installment sale with the payments spread out over time. On the other hand, if the new owner runs your former business into the ground, those future payments may never happen.
One of the ways to limit your exposure to a buyer who lacks the skills to keep the business going is to stay involved in the business until your note is paid off. This allows you to monitor what is happening and to step in to protect the business if the new owner gets into trouble.
3. Installment sale with a referral-based model
A slightly different approach to the installment-sale method is for the agent or broker to exit the business but continue to receive referral income from any past clients he or she refers to the new owner.
4. Family transfer
One of the most common ways that real estate businesses are being sold is through family transfers. Many young people have realized that they can make serious money in real estate — especially if they can successfully step into an existing business that their parents started.
While it may be tempting to pass the business to a loved one, it’s important that you make sure that the person who buys (or takes over) your business has the skill set to keep the business up and running.
Furthermore, even if you were selling your business to your own mother, have an attorney draw up the documents of sale. This protects everyone, especially if something happens to either you or your family member before the sale is complete. The last thing you want to have happen is to have your business sale tied up in probate court.
5. Selling your franchise
If you own a franchise, it’s important that you have an attorney review your franchise agreement regarding what you can and cannot do in terms of selling your franchise. In almost every case, the franchisor will have the right to approve or disapprove your sale. You can avoid needless headaches if you address this issue before pursuing a buyer for your business.
Here are some additional issues to consider:
- Is the buyer’s work ethic strong enough to keep your business going?
- Does the person have the capacity to expand the business beyond what you have built?
- Is the person a good cultural match from your current client base? For example, if most of your clients are boomers, will they relate to a new owner in his early 30s?
- Another important step to take is to thoroughly investigate your buyer. This means running a full-blown credit check even if the buyer is someone you have known and worked with for years. For example, a broker owner was considering selling his business to his top-producing agent. The broker took my advice and ran a credit check. This agent never paid his bills and was a complete mess in terms of his creditworthiness. If she had sold to this man, she probably would have had the double whammy of not getting paid and seeing her business fail.
- This brings up another important issue. If you are financing the sale, it’s important that your attorney puts a provision in the contract that will allow you to take the business over if the new owner misses payments or defaults on his or her obligations.
- When you are ready to sell your business, make sure that you visit your tax professional first to review the laws and the requirements at that time and to maximize the net amount that you will receive.
Do you need more help on preparing to sell your business? If so, don’t miss Part 5 of this series.
