A few months ago, I had a good discussion with the Surfing Guru and one of the topics we talked about was the tax advantages in selling his business, compared to just keeping it.  I was reminded of it again when I was listening to some of the marketing material I listened to this week on Dominiche, the niche program on flipping websites.

Now I’m not a tax expert and I don’t recommend you take these numbers or examples by heart.  You should talk with an accountant about the implications of selling a business.  These are (literally) some back-of-the-napkin calculations that we did when we were out at dinner.

Cash Flow vs. Selling a Business

I think the easiest way to understand the comparison is by using an example, similar to what I got.

• Your business is marking $1M a year
• At that income, your tax rate could be around 50%
• You’re making $500K per year
• At 3x profit, you could sell the business for $3M
• Capital Gains tax rate is 15% so you would clear over $2.5M
• At a 7% return, you would clear about $100K per year. 

If you did nothing, it would take 6 years of cash flow to break even with just selling the business. 

But that doesn’t take into account the time it takes to run the business.  If you had sold the business, you can build up another business.  Let’s say that you build that up to $1M of profit in 3 years and decide to sell that new business. 

After 3 years, you have $5M in the bank from selling 2 businesses, and you’re going to start clearing $250K in interest from those transactions.  This doesn’t even include the profits that you’ll make from your new business.

When Cash Flow is Better

This isn’t to say that cash flow is bad.  Cash flow is VERY GOOD and you should always have some source of cash (you need to feed your family, right?).  But if you’re good at generating cash flow consistently, take advantage of that ability.  Sell your business and then generate additional cash flow. 

If you’re not good at generating cash flow - maybe you inherited your business or you aren’t any good at creating new businesses, then you probably don’t want to sell the business. 

You need to have the ability to generate new sources of income.  Once you do that, sell that source and spend your time and effort on generating another source.  Rinse.  Repeat.