How do you determine what the capital gain is on intellectual property? I started my company with about $100. I have no idea what it’s present value is but I’m sure it would have quite a few more zeros in it. I suppose that would mean the the sales price of the company would essentially be a capital gain, subject to capital gains tax.
Anyone familiar with business appraisals? I can’t even wrap my head around all of the variables to consider.
My only experience with a similar situation came when I bought a company (C- corp) which owned residential lots. When I talked to my accountant about my income on the sale of lots I was thinking that my basis in the lots was the amount I paid for the company divided by the number of lots. I was wrong. The company is a separate entity so the basis in the lots was the amount that the corp originally paid for the lots, which was next to nothing.
I think you’ll definitely need an accountant for that; a good one.
I’m not ready to pull the trigger just yet on selling my company. Just getting a feel for what’s to come. I didn’t know I had to seek out a specialized CPA for this one, thanks for that info. Do these guys also do business appraisals also? I’m in MD.
Here’s my two cents. Intellectual property is basically valued by what someone is willing to pay for it. Since it’s your work, you can put a value you believe is fair and offer it to those interested in obtaining it.
You will find out pretty quickly if your idea of value and what a buyer is willing to pay is close. If there are counter-offers you will have a better feel for what fair market is.
Yes, your capital gain is taxable on the amount of sale over your costs in developing the works. There are ways to minimize this obligation. One is doing an installment sale through a foundation. It provides tax advantages, partial forgiveness of tax obligation, and the ability to spread out your payments of taxes owed over a number of years.
Many times there is an advantage of selling the shares of the LLC as a whole as opposed to selling the property within the LLC.
Of course, each case is slightly different as should be treated as such. CPAs usually aren’t the best for advice in this area. Business brokers and attorneys can be helpful, as well as those who specialize in capital gains tax strategies.
Do you have any info about business appraisals and how they compare to commercial property appraisals? I suppose the value of my company would be the physical assets value applied to a capitalization rate or discount rate or something, plus intellectual property which would be the amount the buyers were willing to pay.
Is the taxable capital gain the sales price less the cost of everything (marketing, acquistion, renovations, office junk, vehicles, etc.) ? Therefore it would be difficult to quantify intellectual property. It could be attributed to quality renovations or marketing in the right places or whatever.
How about 1031’s? I suppose an installment sale would be best as I couldn’t reinvest all the money in a new start-up in the required time-frame.
The sale of businesses is a bit too complex to go into detail here. They can be valued using several different methods.
If there is real estate involved this is valued as any real estate would be. Physical assets typically have a fair market value based on comparable items in comparable conditions and of similar ages. Intellectual property is harder to quantify but is similar to a client list - the value is the perceived value to the buyer and what you feel it should be worth to them. It is often negotiated.
There are certain things you can deduct from the sales price or add to your cost basis, though not everything you mentioned applies.
You can also sell the business as a whole - an agreed upon amount for the entire business (transfer of shares).
There is no one correct way. It really depends on your specific business, your potential buyers and the way your entity is structured.
Feel free to contact me directly if you’d like
I don’t really like paying professionals for legal and tax advice. I’d much rather shoot from the hip using info from people on the internet. It’s much more reliable! :bs
If you join the military and make it to a unit commanded by ARSOF, NSWC, MARSOC or JSOC, I will consider your offer for atleast 3 seconds. Otherwise, as enticing as your offer sounds, I’m gonna have to go with “HELL NO!” Good luck though… :biggrin
i mean, in order to sell a business - you’ve really got to have things spelled out pretty well, from product/service development and sales to management (which is huge).
as far as “intellectual property” - the bottom line on that is if they owner can actually make a good case that there is a good reputation and as a result, revenues generated from the intellectual property.
when we sold our landscaping company, we sold the name along with the business because we had over 100 customers who knew the name and the design and were familiar with it. when we were doing work for them - they knew it was us. their neighbors knew us (and many hired us). we provided services in clusters (3 to 10 houses in blocks) because people would see our shirts, our truck and the work we did, call us and hire us, or the name and design of business.
how do you price that? no idea. we just used a 10 X’s earning format, plus cost of equipment etc.
in the end we sold it for about 40% less than what we originally wanted for it.
I’ve just ordered a book called “Business Enterprise Value Anthology” which will hopefully shine some light on how it’s done. Thus far I’ve discovered there are no set ways to appraise a business which is why there are no state issued licenses.
I believe the intellectual property of my business is worth far more than all the physical assets combined. My name, advertising, marketing, systems, network, management, databases, etc. is what enables me to do what I do. I got 18 leads on properties just today. By some luck if all of those worked out, that would be several million dollars in gross sales. Most rehabbers don’t have anything near that number of leads per day. I have a database of THOUSANDS of vacant properties, most of which are not on any public list.
The revenue generated is not only due to external marketing and branding but also internal systems, management, and “proprietary secrets”.