How Much Will I Keep After I Sell My Business?

Start with how the price gets paid

A purchase price is usually paid in more than one piece. Part arrives at closing as cash, funded by the buyer's own money and usually a bank loan. Part may come later as a seller note, which is a loan you make to the buyer for part of the price, paid back over several years with interest. Part may depend on how the business performs after the sale, which is called an earnout. And part of the closing cash may go into escrow, meaning a neutral third party holds it for a period after closing in case the buyer has a claim against you.

So the first question about any offer is how much of the price is cash at closing. Two offers at $4 million can be very different deals. One pays $3.6 million at closing and carries a $400,000 note. The other pays $2.8 million at closing, puts $600,000 on a note and $600,000 into an earnout. The second offer can be worth taking for the right buyer. It is still a different offer, and the headline hides that.

Debt and liens come off first

Any debt tied to the business gets paid from the proceeds at closing. That includes equipment loans, a bank line of credit, an SBA loan you used to buy or expand the business, and any lien recorded against the assets. A lien is a lender's legal claim on property until a debt is paid. In an asset sale the buyer takes the assets free of those claims, so escrow pays the lenders before it releases anything to you. Leased equipment either gets paid off or the lease moves to the buyer, if the leasing company agrees.

Ask each lender for a payoff letter early. Prepayment penalties sometimes show up there, and an owner who finds one the week of closing has no time to plan around it.

Fees and closing costs

The advisory fee is set in your engagement agreement and is paid from proceeds at closing. After that come your attorney's fees, accounting and tax work, escrow fees, and depending on the deal, lien searches, title work if real estate is involved, and filing costs. We put every one of these on the net sheet before you sign a letter of intent, so you know each number long before closing day.

Working capital

Working capital is the cash, receivables and inventory a business needs to run day to day, minus what it owes in the short term, such as unpaid supplier bills. Receivables are money customers owe you for work already done.

Larger deals often set a working capital target, sometimes called a peg. If the business delivers more than the target at closing, the price goes up. If it delivers less, the price goes down. The final count usually happens 30 to 90 days after closing, in what is called a true-up, and that is where disputes tend to start.

In smaller asset sales the seller often keeps the cash and collects the receivables, and the buyer pays for inventory at a counted value. Either way working capital is money. How it will be treated belongs in the letter of intent, in writing, and we cover the mechanics in Earnouts, Holdbacks, and Working Capital Pegs.

Escrow and holdbacks

Indemnification is your promise in the purchase agreement to cover the buyer's losses if something you stated about the business turns out to be wrong. To back that promise, buyers often ask for part of the price to sit in escrow. On deals in the lower middle market, escrow commonly runs 5 to 15 percent of the price and is held 12 to 24 months, often less on smaller deals. A holdback works the same way except the buyer keeps the money instead of a third party.

You will probably get this money. It still belongs in its own column on the net sheet, because you cannot spend it at closing and it is at risk if a claim comes up.

In California, escrow also handles the state's bulk sale and tax clearance steps, and part of the price can be held until the state confirms that sales and payroll taxes are paid. We explain that process in Bulk Sale Law, Escrow, and Tax Clearance.

Seller notes and earnouts

A seller note pays you over time, with interest, as long as the buyer keeps paying. An earnout pays only if the business hits targets after closing, and the buyer is the one running it by then. Both can be good tools. Both are worth less than the same dollars at closing, because they arrive later and carry risk. On the net sheet we show each one at its face amount, separate from closing cash, with the payment schedule next to it. How to protect a note is covered in Seller Financing.

Taxes

Taxes are the biggest deduction most sellers face and the one they plan for least. What you owe depends on how the deal is structured and how the price is divided among the assets.

In a stock sale, the buyer buys your shares in the company. If you have held them more than a year, most of the gain is usually taxed as a long-term capital gain, which is the lower federal rate on profit from selling an asset held over a year. In an asset sale, the buyer buys the company's assets and the price gets split across categories such as equipment, inventory and goodwill. Goodwill is the value of the name, the customers and the reputation beyond the hard assets. Each category is taxed its own way. Goodwill generally gets capital gains treatment. Equipment you have already depreciated can trigger depreciation recapture, which is taxed at ordinary income rates. Payments for a non-compete or a consulting agreement are ordinary income too. If your company is a C corporation and sells its assets, the gain can be taxed twice, once inside the company and again when the money goes out to you.

Federal long-term capital gains rates run between 15 and 20 percent for most sellers. State tax comes on top. California taxes capital gains at the same rates as wages, up to 13.3 percent at the highest incomes.

We are not tax advisors, and we tell every seller to bring a CPA in before the letter of intent, because the allocation of the price gets negotiated early and is hard to change later. The two posts to read first are Asset Sale vs. Stock Sale and Purchase Price Allocation and Form 8594.

A worked example

Take a hypothetical $4 million asset sale of a services company. The buyer pays $3.6 million at closing and the seller carries a $400,000 note over five years. Of the closing cash, $200,000 goes into escrow for 18 months.

At closing, escrow pays off $300,000 on an equipment loan and a line of credit. The seller keeps the receivables, about $150,000, and collects them over the next two months. Fees and closing costs come off next.

Before fees and taxes, the seller receives $3.1 million at closing, $150,000 in receivables over 60 days, $200,000 in 18 months if no claim is made, and $400,000 plus interest over five years. The price was $4 million. The cash in hand the week after closing, before fees and taxes, is $3.1 million.

The net sheet

A net sheet is a one page estimate of what you take home from a specific offer: the price, minus debt, fees, closing costs and estimated taxes, split by when each dollar arrives. We build one for every offer a seller receives and put competing offers side by side, so the choice gets made on what you keep and when you get it. If you want to see that math on your own business before you go to market, that is where a conversation with us starts.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.