Planning for Your Exit: What to Consider When Selling a Business

By: Keith Olson, Williston Center Director

At the SBDC, we work with small business owners every day. These are hardworking individuals who have poured years, sometimes decades, into building something from the ground up. Whether it is a local restaurant, HVAC service, repair shop, or professional firm, many of these businesses revolve around one person, the owner. Their relationships, expertise, and reputation are at the core of the business.

As you begin planning for a sale, there are many moving pieces to consider. While we cannot provide legal or tax advice, we can help you understand common issues and guide you to ask smarter questions. These conversations can ultimately save you time, money, and stress as you approach your next chapter.

Let’s walk through a general example that highlights some important considerations.

A Common Scenario

Paul built his funeral home business over 44 years. Like many small business owners, he chose to operate as an S corporation early on, based on advice from his accountant.

When he was ready to retire, he found a buyer willing to pay $6 million. However, there was a complication. The buyer did not want to purchase the S corporation stock, only the assets.

This is common. Buyers often prefer asset purchases because they can avoid unknown liabilities and benefit from tax advantages tied to acquiring assets.

This created a challenge for Paul. His corporation would receive the $6 million, but because his tax basis was nearly zero, most of the proceeds would be taxed as a gain. When he withdrew the funds from the corporation, he would be taxed again, resulting in double taxation.

One of Paul’s advisors then introduced a concept that could change the outcome: personal goodwill.

Understanding Personal Goodwill

Goodwill represents the value of a business beyond its physical assets. It includes reputation, customer loyalty, brand recognition, and trust built over time.

In many small or owner-operated businesses, a significant portion of that goodwill belongs to the individual owner, not the company itself.

Examples of personal goodwill include:

• A salon owner booked out months in advance
• A trusted HVAC technician known by name in the community
• A CPA or attorney whose personal reputation drives the business
• An auto shop owner deeply involved in every customer relationship

When buyers purchase these businesses, they are not just acquiring equipment or inventory. They are also acquiring relationships, credibility, and a track record. In some cases, structuring part of the sale around personal goodwill, when done correctly and supported by professionals, may provide tax advantages.

Stock Sale vs. Asset Sale

Buyers typically prefer asset sales for several reasons:

• They can avoid existing liabilities
• They receive tax benefits, such as depreciation, by establishing a new asset basis
• They can choose specific assets or parts of the business to acquire

For owners of S corporations or C corporations, asset sales can create tax challenges:

1. The corporation pays tax on the sale of assets
2. The owner pays tax again when funds are distributed

This is where personal goodwill may play an important role. In some situations, it allows a portion of the sale to be taxed once and potentially at more favorable rates, depending on how the transaction is structured.

If your business:

• Is built around your personal reputation
• Relies heavily on your customer relationships
• Positions you as the face of the brand

Then personal goodwill should be part of your exit planning discussion.

It may:

• Reduce your overall tax burden
• Make the transaction more flexible for buyers
• Help you retain more of the value you have built
• Open the door to alternative deal structures, such as contract-for-deed or owner financing

Selling your business is one of the most important financial decisions you will make. With thoughtful planning and the right team of professionals, you can structure a transition that protects both your legacy and your financial future.

If you are considering selling your business and want help preparing for the process, the ND SBDC is here to help. Our advisors provide no-cost, confidential guidance to help you evaluate your options and move forward with confidence. Visit ndsbdc.org to connect with an advisor.