Selling your company is a big decision. One of the key decisions you need to make is the method of selling because it will affect matters such as your taxation and other practicalities.
You can sell a limited liability company either through a sale of shares or a sale of business.
Differences between a sale of shares and a sale of business
The key difference is the party selling the company.
In a sale of shares, the company’s shareholders sell the shares entitling ownership of the company to the buyer. The shareholders get the sales price themselves. Through the transaction, all the rights and responsibilities attached to the ownership of shares, such as debts and liabilities, are transferred to the buyer.
The sale of shares of a limited liability company doesn’t in itself affect the company’s operations, but it’s possible that the new owners want to develop the company’s operations and make changes.
In a sale of business, the company sells its business to the buyer, either in part or in full, and the buyer pays the acquisition price to the seller company. As part of the transaction, the company’s customer and contractual relationships are often transferred to the buyer.
However, debts and liabilities are not transferred but remain with the seller. Neither does a business transfer affect the ownership of shares of the seller company.
Impact of a sale of shares and a sale of business on taxation
The sale of shares has no tax consequences for the company. Instead, the shareholder selling the shares will become liable to pay tax. The buyer, on their part, will have to pay the transfer tax.
The seller may deduct the acquisition cost of shares from the sales price. The difference is considered a sales profit, i.e. a capital gain, on the basis of which the tax on sales profit is determined. The capital gain is taxed as capital income. The tax rate on capital income is 30% up to 30,000 euros and 34% for the part exceeding that amount.
If the seller of shares is a limited liability company, the tax treatment depends on whether the share transaction is subject to tax under the Business Income Tax Act or the Income Tax Act.
In the sale of business, the seller is the company. Therefore, the sales price is considered income for the seller company, which has to pay a 20% tax based on the corporate tax rate. However, the seller company may deduct the unamortised purchase price from the sales price in income taxation. The difference is considered as income.
From the shareholder’s viewpoint, a business transfer is subject to double taxation: the company pays tax in connection with the sale of the company, and the shareholders pay tax when they draw down funds gained from the business transfer in the form of salary or dividend.
Which option should you choose?
Each sale of a company and the choices it involves are unique.
Several aspects need to be considered when choosing the method of sale. The key aspects include, among other things, the sales price, the terms of sale, taxation, the need for funds and the seller’s future plans.
Several companies in Finland specialise in corporate sales and acquisitions. OP helps you in planning an acquisition and the related financing.
FAQs
Reasons to Sell Stock in Your Company
Likewise, selling part of a business can reduce the owner's risk and allow them to diversify their personal assets.
What should you sell your business for? ›
Generally speaking, business values will range somewhere between one to five times their annual cash flow. When you estimate your earnings multiplier, you can assess your business in several key areas that impact the future, such as profit trends and revenue. This also factors in customer base and industry position.
How do you value a business to sell shares? ›
Price to earnings ratio
This is often calculated using an average of share prices and earnings over the previous twelve months. Your P/E ratio can then be compared to other businesses within your industry to determine if it falls below, meets, or exceeds the industry average.
Should I close my business or sell it? ›
Closing your business means shutting down operations and liquidating assets, which results in a lower return on investment. However, selling your business to a qualified buyer can provide a much higher return on investment and potentially yield a profit.
What are the risks of selling shares? ›
One of the primary disadvantages of selling shares is the potential loss of control for existing shareholders, especially if you sell a significant portion of ownership to external investors. New shareholders may have differing opinions on business strategies and decision-making, which could lead to conflicts.
Should I sell my shares back to the company? ›
Share buybacks can be beneficial for both parties. The seller is able to get rid of shares that they no longer want or need to free up capital, without having to search for a buyer. And the company is able to strengthen its share price and shareholder value.
How much is a business worth with $500,000 in sales? ›
Use Revenue or Earnings as Your Guide
For example, if the industry standard is "three times sales" and your revenue for last year was $500,000, your revenue-based valuation would be $1.5 million. Multiplying your earnings, or how much your business makes after subtracting its costs, is another valuation method.
How much is a business worth that makes 100k a year? ›
The specific multiple used often ranges from 2 to 6 times EBITDA depending on the size, industry, profit margins, and growth prospects. For example, a retail store doing $100,000 in annual EBITDA could be valued roughly at $200,000 to $600,000 based on a 2X – 6X EBITDA rule of thumb.
How much is a business worth with $1 million in sales? ›
The exact value of a business with $1 million in sales would depend on the profitability of the business and its assets. Generally, a business is worth anywhere from one to five times its annual sales. So, in this case, the business would be worth between $1 million and $5 million.
What is the rule of thumb for valuing a business? ›
For example, a business in question could have a rule of thumb that states 3 to 5 times earnings. If an accurate earnings description is $500,000, the value could be too high or too low by $1,000,000! Alternatively, it might state three times earnings or 80 to 100% of revenue or a sales multiplier.
Take your total assets and subtract your total liabilities. This approach makes it easy to trace to the valuation because it's coming directly from your accounting/record keeping.
How do I sell my small business shares? ›
What steps are essential for selling shares in a private company?
- Obtain approval from the issuing company.
- Determine the value of your shares.
- Find a buyer, either directly or through a broker.
- Negotiate and agree on a price.
- Complete the sale with a legal contract.
The rollover exclusion option allows you to minimize your tax liability by excluding certain income from taxation. You may choose this option if you sell your lower middle market business for cash or stock, and you likely will have to have owned your business for a certain amount of time to qualify.
How do you know when it's time to sell your business? ›
As we mentioned, the best time to sell your business is when it's doing well: the financials trend upwards, sales are booming, the team is strong, and demand is high. It can be difficult to walk away when the business is doing so well, but that's the exact time we recommend planning your exit.
How do you know it's time to close your business? ›
Closing Out: How To Know When It's Time To Shut Down Your Business
- Annual revenue projections are falling short. ...
- Your personal health is declining. ...
- You no longer believe in the mission of the business. ...
- The business isn't scalable. ...
- There's no demand.
They include: As the company grows, companies reap the rewards of investors' money by selling stock on a stock exchange. The most significant benefit of selling shares is the ability to raise funds for the company. Furthermore, it increases the level of accountability and attracts more investors.
Why would a CEO sell their shares? ›
Conversely, insider selling can be seen that executives believe the company and its stock price may underperform in the future. As a result, the executive may establish a plan that liquidates 1,000 shares per month over the next year. Again, the trades are automatic and take place at a set point in time.
Why do directors sell their shares? ›
Sometimes directors may sell shares for reasons completely unrelated to the underlying performance of the company. For example, they may sell their shares for purely personal reasons (such as needing the cash for a new property of even a divorce). Other times a director may sell their shares for tax reasons.
Why would shareholders want to sell their shares? ›
A shareholder in a company may wish to transfer or sell shares for a variety of reasons. These may include personal financial circ*mstances, change of investment strategy, or the desire to exit a particular company.
