How can you sell a company

How is the company sale taxed?

Enterprise value, inheritance - there is a lot to consider when selling your business. But the most important thing is: What tax burden do you have to face? We'll tell you.

Selling a company is not a real estate sale

It takes a long time, is difficult, and gets on my nerves personally. Who leaves a company that has grown over many years with a light heart? After all the years as a senior boss building your company and making it what it is today. And now you should hand it over to other hands, possibly strangers who want to buy your company.

Why is the business sale task so difficult for owners?

Thomas Salzmann is a management consultant from Hamburg. He has specialized in company sales with the company Everto Consulting. He gives reasons. When selling his company, the entrepreneur has to make many decisions in different areas in a short time and in the right order.

Salzmann names the most important challenges:

  • Calculation of the company value
  • tax aspects
  • consequences under inheritance law
  • business issues

From a message from Salzmann to the press:

"Selling a company cannot be compared to selling real estate."
Many entrepreneurs underestimated them considerable time demand by selling a company. In addition to the day-to-day business, it can hardly be managed. Sales plans could also leak out to the public too early and in an uncontrolled manner. With unforeseeable effects on customers, employees and suppliers, but above all on the Selling price. If the sales plans are known too early, this could lead to emigration of employees and unsettle customers.

Securing the life's work

As an entrepreneur who wants to sell his company, Salzmann advises you to come up with an appealing sales concept:

  • prior thorough analysis
  • workable company valuation and
  • extreme care (due diligence)

It depends on the individual marketing. The company's development potential should be in the foreground. Only then could you address suitable buyers and thus secure the sale of your company and thus your life's work with comprehensible decisions.

What many entrepreneurs forget in the mass of points to consider: After the company has been sold, the tax office stands on your mat and wants its share of the cake. Not only the profit from your ongoing business activity, but also the profit from the sale of your company is subject to taxation.

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How is sales profit taxed?

Basis of dimensioning

First of all, as a taxable entrepreneur who wants to sell his company, you determine the basis for the assessment of your income tax. In doing so, they combine current and extraordinary, i.e. not regularly achievable, income from a specific assessment period. You will find that your taxable income in the year your company was sold will be noticeably higher than in the previous assessment periods.

Future achievable profits

In principle, the tax office applies increasing income a higher tax rate at. It justifies this with a higher performance with a higher income, motto: Those who earn more can pay more taxes. When selling a company, however, one only prefers future achievable profits through the sale in an assessment period. But there is no increased performance.

How is the applicable tax rate determined?

The tax office does this automatically with the so-called fifth rule: It distributes the capital gain fictitiously over five years, i.e. divides it by five in front. The legislature has privileged capital gains.

Prerequisite: sale of the business

However, the prerequisite for this procedure and other benefits associated with the sale of the company is a sale of the business as a whole. All essential operating principles are transferred to an acquirer in a uniform process so that the acquirer can continue operations.

Alternative: reduced tax rate

As an alternative to the one-fifth rule, certain taxpayers can claim a reduced tax rate for capital gains. This amounts to 56 percent of the average tax rate for the entire income in the assessment period of the business sale. However, the reduced tax rate must be at least 14 percent. In addition to the reduced tax rate, you can receive an exemption of 45,000 euros or, in the case of a capital gain of 136,000 euros or more, the excess amount correspondingly less.

example

For example, let's say you are 60 years old and a carpenter. In 2017 you sold your company with a capital gain of 130,000 euros. In the year before the sale, your company made a profit of 40,000 euros. You have not yet submitted any applications for the reduced tax rate or the tax exemption. You have therefore reached the age of 55 and sold your company with a profit of no more than five million euros. You can therefore claim both the reduced tax rate and the tax exemption. The reduced tax rate is usually more advantageous for you as a taxable entrepreneur. Your calculations can look like this:

Capital gain € 130,000 - tax exemption € 45,000

= taxable capital gain € 85,000

taxable capital gain € 85,000 + current profit € 40,000

= Total amount of income € 125,000

-> Income tax € 44,024 -> average tax rate 35.22%

35.22% × 56% = reduced tax rate 19.72%

For the profit you owe the tax office 16,762 euros in taxes.

 

Can you always take advantage of the reduced tax rate?

No, only once in your life as a taxable entrepreneur under the following conditions:

  • In contrast to the automatic granting of the one-fifth rule, you submit an application to the tax office.
  • You have reached the age of 55 or are permanently disabled under social security law and
  • Your capital gain is less than five million euros.

If you meet these requirements, you can choose whether you want to take advantage of the one-fifth rule or the reduced tax rate.