Nightmare: 'I Sold My Company and Owe More in Taxes Than I Actually Made!'
Here's how to avoid this entrepreneur's nightmare.
Imagine selling your company and owing more money than you actually got paid.
While it might sound ridiculous, I’ve seen it happen. I’m a lawyer and an accountant, but in this particular case, another lawyer did the paperwork for the deal. When they came to me to complete the tax return, I had to break the news to the business owners that, because they’d failed to plan, they would have to pay more money than they were receiving to sell their own company. And not just a little more -- nearly four times more.
A purchase letter of intent, especially an unexpected one, can be a thrilling moment for any entrepreneur. This is what you’ve been waiting for, right? But too many business owners trip over their own feet running towards the check.
Ultimately, many entrepreneurs fall prey to the lure of a purchase offer and do themselves more harm than good. These are the most common ways I see entrepreneurs hurt themselves when an offer comes in.
1. They don’t know the market value of their own company.
It’s easy to get impressed by a big number.
But what if your company is actually worth double whatever you’ve been offered? Do you know your own market value?
It’s time to do some market recon to determine if this is even a good deal -- yet many business owners see that offer, one that they might not have even anticipated, and rid themselves of rational thought, nevermind the willingness to do research.
You have to look at what’s happening in your domain -- how similar companies are being valued, what the multipliers are for your industry and recent sales. You can’t begin to determine whether the deal is right for you if you don’t know your own worth.
2. They don’t have their books in order.
If the offer advances, then the process of due diligence begins. That means the potential buyer is going to see everything, and your books better match your tax returns.
It’s easy to put off what you consider minor details when it comes to bookkeeping. When you’re running your own business, it can always be dealt with later, right?
But now your books are going to be opened up, and every little mistake or detail you missed is going to be scrutinized -- and not by just one person, but a team of experts. You’re going to pay significant taxes on the deal no matter what, but having your books in order will allow you to find savings and ensure you’ll get the net cash you’re looking for.
3. They don’t ask enough questions.
Don’t just go along for the ride. Set a stake in the ground and ensure you and your team know everything there is to know about this potential deal.
Consider what type of purchase the buyer is looking for. Stock or assets? Cash or installments? If the latter, be wary: that was the scenario that produced the anecdote at the start of this piece.
What about NDAs and non-circumvents? Competitors sometimes make offers just so they can learn trade secrets. You’ve got to ensure you’re protected from any such action by having the right paperwork and agreements in place before the process moves forward an inch.
Related: 15 Ways to Grow Your Business Fast
And you won’t know what those sticking points are if you never ask the questions. I’ve seen people end up in terrible situations after a buyout, and almost always because they were too enamored with the mere fact that they got an offer to question anything else.
4. They stop working.
Managing an offer opens up an entirely new set of tasks and logistical challenges -- but it doesn’t mean your business stops running.
You’ll be talking to someone new every hour, signing endless papers, crunching numbers and considering major life changes. Meanwhile, you still have a business to run. The reason you received an offer in the first place is that you’re good at it, but you’re not superhuman.
The reality is that a letter of purchase intent is just that -- a letter. It is non-binding and often won’t lead to an actual sale. And even if the process goes further, it can take weeks, months or years to play out. Before you get lost in thoughts of retiring on your own private island, remember that you still have work to do, and will likely be doing it for a while whether or not the offer advances.
When an offer letter comes in, pop the champagne and toast your success. Then get back to work, and, most importantly, get out of your own way.
Entrepreneur Leadership Network Contributor