Preparing to sell a business structured as a pass-through entity

Partners considering an exit strategy from their pass-through businesses have several options, and knowing the purpose of a sale helps prepare for the future. Owners working out a business divorce may, for example, decide to retire or start another enterprise.

Based on each partner’s objectives, audited financial statements provide the necessary tools to move forward. As noted by Kiplinger Small Business, exiting a commercial enterprise could take at least six months and as long as five years. Valuing a business and finding a suitable successor could result in an owner receiving a higher sale price.

Gathering information required for a business sale

Pass-through entities such as partnerships, limited liability companies and S corporations may have complex tax issues when owners exit a business. While designed to prevent double taxation, partners, members or shareholders may incur personal tax liabilities after selling ownership stakes.

When structuring a sale, owners may prefer to receive their proceeds as a long-term capital gain. This option may result in lower tax liabilities than selling a business as a means of producing income. Understanding a business’s earnings before interest, taxes, depreciation and amortization or EBITDA can make a difference in how owners offer an enterprise for sale.

Preparing a successor who may require mentorship

In some cases, an existing employee or individual experienced in the business’s operations may have an interest in taking control of it. As noted by Kiplinger Business, a detailed succession plan may outline the skills a successor needs to develop. It may also detail the milestones determining when he or she can take over. Existing partners, employees and customers can help facilitate a smooth transition.

Owners intending to exit their business ventures may require extended planning and preparation. Financial and tax matters may determine the method of selling a business. Effectively training a successor provides confidence that the enterprise can continue.