A Quick Guide to the Most Important Financial Considerations

Selling your business is obviously a hugely important life decision. It can result in a sizable financial windfall, but once it is sold, the annual cash flow from the business dries up. Also, for many business owners, they were able to (legitimately) run many expenses through the business that now have to be paid with after tax dollars.

On top of those two concerns, we need to add in the debt and tax implications. We often have clients who are overly focused on the number that they are going to get for their business, and not on the net proceeds from the transaction. When they were operating the site and had good cash flows, servicing the debt was not a problem, but when they sell it they often need to pay off a large chunk of debt all at once.

Taxes can reduce that payday considerably too. Often sellers have owned their gas station/c-store for many years, and will benefit from a good amount of appreciation of their asset. On the flip side, the buildings and equipment are likely fully depreciated, so the owner’s basis in the property is diminished, resulting in a larger tax bill.

There are some strategies to mitigate the damage to your pocketbook that all these factors can cause. The easiest and most effective strategy that we know of is the 1031 exchange.

The 1031 exchange is named for the section of the federal tax code that provides for the exchange of one business property for another, while deferring taxes to a later
date, when the exchanged property is sold. It was intended to keep real estate transactions flowing rather than have sellers take their money and put it on the sidelines. It has been an excellent resource for property owners and very helpful to the commercial real estate market.

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