While it may seem counterintuitive, when planning to sell your business, it is often better to pay more in corporate taxes. Now we know what you're thinking, "why would I ever pay more in taxes?"
When selling a business, the value of the company is typically based on a multiple of its earnings before interest, taxes, depreciation, and amortization (EBITDA). This means that the higher the EBITDA, the more valuable the business. If the EBITDA is low, the business may be seen as less attractive to potential buyers, which can impact the sale price and the ability to find a buyer. This is where taxes come into play.
Many business owners try to minimize their tax liability by taking optimizing their use of deductions and write-offs. While this can be beneficial in the short term, it can actually hurt the value of the business when it comes time to sell. If a business owner writes off too many expenses, it can make it look like the business is not as profitable as it actually is. While this is (sometimes) explainable to the buyer, the people that will loan money to buyers (the bank) tend to not be as “open-minded” to these tax optimizations. The result? Your business qualifies for less financing, meaning your buyer needs a large cash down payment, which means a smaller pool of qualified buyers.
So how does paying more tax help? If a business owner pays more in taxes (for example by taking a higher amount of salary vs. dividends), it shows the bank a higher level of earnings. It also gives a buyer more confidence when examining the financial statements of a business, they want to see that it is profitable and has a strong track record of earnings. More confidence means a buyer is more likely to submit an offer and complete due diligence with fewer hiccups, which is key to a successful sale.
While it may seem counterintuitive, paying more in taxes when selling a business can actually be beneficial. By doing so, a business owner can show a bank their business is profitable and has a high EBITDA, which can make it qualify for more financing. This can also help boost buyer confidence, ultimately resulting in a higher sale price. So, if you're considering selling your business, it's important to work with a trusted financial advisor to ensure that you're maximizing the value of your company and positioning it for a successful sale.