Don't Regret Selling Your Internet Business
Taxes, a better plan and an exit strategy. Think about these things before handing over the keys.
Opinions expressed by Entrepreneur contributors are their own.
Selling an online business is a huge step. Your company represents years of hard work, so it makes sense to guard it closely as your prize asset. Because when it comes time to sell it, you need to be absolutely sure you know what you are doing, since there are a lot of factors you need to consider before you sell.
Related: 10 Questions to Ask Before Selling Your Business
Here are three common regrets sellers have after selling their online businesses.
1. I wish I knew what I'd pay in taxes.
When thinking about their big payday, many online business owners tend to forget that there is someone else other than their broker they need to pay -- the government. Remember the only two certainties in life: death and taxes. When you sell your business, the government will most certainly send you a bill. And the bill is often much more than business owners think it will be.
Tax issues are always a very complex subject, so therefore you should always leave this area to your accountant. But to give you a very quick rundown, much of your tax liability will depend on how your deal is structured and how the sale price is allocated. Most of the time, the vast majority of the money is allocated to capital gains tax.
Even if you fall under the capital gains tax rate of 15 percent, that is still a big bill to the Internal Revenue Service. For a website that sells for $250,000, you'll owe the government $37,500! Most entrepreneurs will actually fall under the 20 percent capital gains tax rate. But if some of your purchase price is allocated toward taxable income, you'll pay as much as 39 percent on that portion.
The picture gets even more complex when any portion allocated towards income taxes can screw up your entire annual tax bill. This does not include your local and state taxes, which are extra.
You may not think that there is a silver lining to this cloud, but there actually is. If you sell the business, you can arrange for several years of income at a lower tax rate. All you need to do is declare those earnings as capital gains tax instead of income tax. If you do that, your tax rate will drop from 39.6 percent to 20 percent.
Related: Digitally Sold: The Logistics of Transferring Your Online Business
2. I wish I had come up with a better plan for my next venture.
If your first business venture was a complete success, it would be very easy for you to assume that your next business will be a success too. But there are several mistakes with this line of thinking which could have a very negative effect on the cash flow.
- Your new business isn't guaranteed to work. After I sold my first online business, I immediately spent money to start up a second online business. But I soon found that monetizing the site was more difficult than I thought. I had to spend more time than I anticipated, and more time means more money. Which leads me neatly to my next point.
- You spend money faster when starting a new business. When I had my first business, expenses were fairly predictable. When I worked on my new startup, expenses skyrocketed. Design fees, programming fees and marketing fees compressed my "I'm going broke" deadline significantly.
- You may need to abandon ship. Before you jump ship on your already established and successful business, make sure the ship you are jumping into is seaworthy. As much as possible, test your new concept and get it started. Once you have confidence in its ability to be a viable business, then you can sell your existing business with more confidence.
3. I wish I'd positioned my business better.
Exit strategy planning can make a huge difference in the final price you get for your business. But exit strategy planning takes time. On average, sellers need to put just over a year into their businesses to get them ready for a high-value sale.
For my first business, I first considered selling it far too early. Fortunately, the broker I first spoke to about selling advised me to wait. I'm glad he did -- by waiting 14 months and focusing my efforts on increasing earnings, I gained 450 percent in total value for my business -- and I earned good money in the meantime.
However, what I regret is I didn't do more to build the value in the business. About 18 months after I sold the company, I learned that the new owner was offered twice as much for the business than he paid me. What rubs salt in the wounds is that he didn't have to increase the earnings of the company at all. In other words, although I was happy increasing the website's value by 450 percent, I could have instead enjoyed a gain of 983 percent.
There are a lot of good reasons to sell your online business, and plenty of entrepreneurs cash in every year on the assets they built. But there are also reasons for regret due to lack of proper planning. Talk to your broker, talk to your accountant and heed their advice. Then hopefully you won't be one with regrets.
Related: 7 Vital Steps to Position Your Company for Acquisition