September 23, 2019 in Entrepreneurship | by Scott Wood

My Company Sold For $20 Million, Now What?

Congratulations, you’ve sold your business for $20 million. However, once the sale is completed, you may find yourself with closer to $15 million after taxes and fees. This comes as a surprise to most first-time sellers, since it’s hard to anticipate how quickly taxes and costs add up.


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The large lump sum from selling your company may appear to be a windfall of wealth, but it may not stretch as far as you think. After you sell your business, the former income stream you enjoyed is no longer present and you may wonder if it’s possible to maintain your current lifestyle on the payout alone.

It’s important to ask yourself this question before you sell your company. It’s also possible to keep a larger portion of the sale proceeds by managing your taxes wisely and maximizing charitable contributions ahead of time with your financial advisor. First, let’s dive into how fees can accumulate.

The Cost of Selling a Business

Selling a company is much more involved than just listing it on a marketplace. Typically, a sales team will consist of lawyers, investment bankers, and tax professionals. In addition, outside consultants and other people may become involved during parts of the process. Preparation can be costly.

Common costs for selling a company can include the following:

  • Legal fees
  • Investment banking fees
  • Capital gains and other taxes 
  • Costs to prepare the business for sale   
  • Performance hold-back

The process of preparing a business for a sale and subsequently, selling it, can take months or even years. Even with that, the transaction may continue after the deal is closed. Once a buyer has committed to the purchase, it’s important that the business performs as promised, which is why sale contracts can sometimes include a performance hold-back.

A performance hold-back allows the buyer to retain a portion of the sale price to ensure that the company performs as predicted. If the company misses predetermined targets, then the withheld money is kept by the buyer. This means if your business fails to meet future expectations, an additional slice of your sale disappears from your wallet.

Fees and Tax Example

If a business owner has an opportunity to sell his/her company for $20 million, it’s easy to accumulate extensive fees. The cost of preparing the business and executing the transaction can feasibly cost $1 million. After the company is sold, the seller will pay taxes of $4 million (i.e. 20%), which is on the low end. Ultimately, the owner is left with about $15 million in capital. While this net amount may seem like a lot, it may not be enough to maintain the former owner’s lifestyle for the duration of their lifetime. What if he/she is accustomed to spending $1 million a year?

It’s common for investors to withdraw 3% to 4% from their investment portfolios each year, to preserve capital. With the $15 million generated from the sale, withdrawing 3% to 4% means the owner takes $450,000 to $600,000 out of the portfolio annually. This number is noticeably less than the $1 million a year it costs to maintain the seller’s lifestyle. In order for this to work, the seller would have to be willing to adjust his/her spending, or draw down their portfolio faster.

Pre-Transaction Planning

True North can help bridge this gap. As an independent Wealth Management firm, True North’s sole source of income is a percentage fee on assets under management, which means growing our clients’ portfolios is the only way we make more money. During a business sale, True North helps clients optimize their portfolios to protect as much of the proceeds as possible. This includes minimizing taxes and maximizing charitable contributions. 

Selling your business is a substantial, and often, very personal decision. Such a life-changing choice cannot be taken lightly. It requires thought, research and preparation - as well as foresight - to plan for your financial future. Choosing the right people to surround you and support you during this process is the most important step you can take. True North Advisors stands ready to support you in helping to protecting your future. 

 

Filed Under: Entrepreneurship

   
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