If you operate a small company -- less than $2 million in revenue -- and you hope to sell it to finance your retirement, certified public accountant Scott Miller says now, before taxes go up in 2013, is the time to figure out a strategy.
He warns that small companies are very difficult to sell today for several reasons. For one, there are limited numbers of buyers because the generation that follows the boomers is much smaller. Even if you can find a potential buyer, the chances that he or she will be able to get traditional financing is slim. Capital requirements have increased and banks are terrified of losses, so they consider loans for buyouts extremely risky, Miller says.
Private equity, another financing possibility for large companies, is also difficult for most small companies to secure because private equity firms are intent on investing in larger firms with greater potential for profit -- "$500,000 is chump change," Miller says.
Miller, who is the author of "Buyouts: Success for Owners, Management, PEGs, Families, ESOPs, and Mergers and Acquisitions," believes the best plan for a small-business owner is an internal transfer. In this deal, a business owner identifies a buyer or two who are already involved in the business, then negotiates an installment sale deal with them. The negotiated details including price and timing.
Rising taxes are one good reason for expediting this deal, Miller says, pushing it into the last three months of 2012. A seller who is concerned about rising taxes can expedite the installment sale and choose to pay all the taxes at 2012 rates. Then in subsequent -- potentially high tax years -- when the money actually is paid by the buyer, it passes to the seller tax-free.
Miller says that if you think this version of retirement planning is attractive, you should get moving quickly. "If the business owner doesn't have an aha moment until Nov. 1, it's too late. The train will have already left the station."