Selling a business is no small undertaking and should involve the assistance of your financial and legal team. The structure of your sale could have significant effects on your tax liability. 

Here are some steps to consider in selling a business, particularly a business structured as an S corporation.

A fair sales price could be calculated with the assistance of a certified valuation analyst (CVA) or someone accredited in business valuation (ABV). They’ll use one or more of three approaches:

An asset-based approach calculates the value of each asset and liability. This approach is useful for businesses with investment holdings, are asset intensive, undergoing liquidation or for those with non-operating assets.

A market approach calculates the value of a business based on the value of stock in comparable companies. 

An income approach calculates value by capitalizing cash flows or discounting expected future earnings. This is generally considered the best estimate for a business as a going concern because it considers future cash flows associated with business assets.

Although you have options in determining how to value your business, a CVA or ABV offers the best way to ensure the value is accurate and reasonable. There are other options to determine a sales price, among them the amount a willing buyer and seller agree upon or various earnings multiples by industry. If you aren’t able to sell at your desired price, explore such other options as working as an employee of the business after the sale to supplement income. 

The next step is finding a buyer. This step isn’t necessary if you have an individual close to you who’ll buy the business, such as a family member, friend or employee. If that’s not an option, you could engage a broker to list your business for sale at a cost of typically 5 percent to 10 percent of the sales price. Brokers have access to networks to locate buyers and could help buyers with financing options.

As an S corporation seller, you have a couple of ways to structure the sale:

Sale of stock offers the most advantageous structure from a tax standpoint. This structure results in the associated gains taxed at capital gains rates. If you’re in a 37 percent ordinary income tax bracket, pushing income to a 20 percent capital gains bracket can result in significant savings. Unfortunately, most buyers won’t agree to purchase stock because this entails purchasing the business in its entirety. Buyers are wary of potential unrecorded liabilities and the unavailability of future deductions through depreciation and amortization that an asset sale allows.

Under the more common sale of assets, the buyer is treated as purchasing all business assets. The buyer usually starts a new entity to hold the assets. The seller is likely left with an empty shell company to shut down after liabilities have been addressed. As the seller, your goal is to maximize the purchase price allocation to goodwill, because it’s not subject to ordinary income recapture. This will be a negotiating point since the buyer has the opposite goal: assign as much purchase price to equipment, which has a shorter depreciable life.

The installment method is available under both the stock and asset sale methods. Under this method, the seller acts as a lender to the buyer. This method is tax advantageous as the seller recognizes only payments they collect for the year as income. This could prevent the seller from bumping into the highest tax bracket in the year of sale. Note, however, that gains must be recognized in the year of sale to the extent there is depreciation recapture under the asset sale method.

When you get serious about selling your business, it’s important to engage a lawyer, certified public accountant, CVA or ABV to assist you through the process. They’ll provide personalized advice and ensure important considerations aren’t overlooked.