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Selling Your Business

Selling your business is largely about setting realistic expectations, avoiding surprises, and keeping the end result in mind throughout the process. When you decide to sell your business, you will transfer ownership immediately and receive payment for your assets right away. In this module, we will take a look at the steps you should take effectively sell your business.

Step #1:  Decide When to Sell

Deciding when to sell your business is the first step in the process – and could be the most important step. You will need to consider both external and internal factors in this decision. Take a look at the following chart to review some thoughts in this area:

Step #2:  Hire Professional Help

There are four professionals that may be of great value to you as you proceed to sell your business:  business broker, professional appraiser, business attorney, and a CPA. Let’s take a closer look at the value these professionals may bring to your business as you prepare to sell and go through the sales process.

Business Broker

In most instances, the sale of a business justifies the use of a business broker. A broker’s commission is usually 10 percent and is paid after closing of the sale (much like a real estate broker). A broker can assist you in building your selling packet and can speed up the time it takes to sell the business. Furthermore, he/she will be responsible for marketing activities and screening of potential buyers. You should consider the following when determining who to use as a business broker:

  • Does the broker have specialized experience in your industry?

  • Does the broker have a good reputation?

  • Will the broker prepare a business profile?

  • Will the broker provide suitable marketing activities for the sale of your business?

Professional Appraiser

A professional appraisal may add credibility in the valuation of your business. Additionally, it can provide a comprehensive and detailed document that will withstand tough scrutiny and provide a specific opinion of value. While an appraisal will not be the only way to establish value for your business, it may stand out as a respected tool.

Business Attorney

Your attorney will advise if your sale should be structured as an acquisition or a merger. Furthermore, he or she will provide you with advice as to whether you should sell your assets or your stock. Additionally, your attorney will collaborate with your CPA to minimize tax burdens with the sale of your business.

CPA

Your CPA and business attorney should be a part of the sales process from the beginning. Your CPA, along with your attorney, will help structure the sale of your business so as to minimize taxes and maximize profit. 

Step #3:  Determine a Price Range

Before you can really go any further with the sale of your business, you need to make sure you have your books in order; otherwise, you will have a difficult time establishing what your business is worth. The following information should be used to help you determine the value of your business and what you should consider as a price point for sale:

  • Financial statements for the last three years

  • Tax returns for the last three years

  • List of furniture, fixtures and equipment

  • List of inventory with approximate value

  • List of employees

  • Customer lists

  • Copies of the lease and equipment leases

  • Franchise agreement (if applicable)

  • List of any outstanding loans with balance and payment schedule

  • Names of outside advisors (e.g., attorney, CPA, etc.)

You should also look at the geographic area or industry statistics on the selling prices of similar businesses so you can see what the market may bear in your case.  Remember, if your price is too high, you may scare away buyers.  On the other hand, if the price is too low, you may not get the full benefit of selling your business. 

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Step #4:  Understand the Tax Consequences 

Taxes can be a huge factor in the sale of your business. When you sell your business, you may face a significant tax bill. In fact, if you’re not careful, you can wind up with less than half of the purchase price in your pocket after taxes are paid. 

You will be taxed on the profit you make from selling the business. The amount of tax you will ultimately pay depends on whether the money you make from the sale is taxed as ordinary income or capital gains. Usually, profit received from the sale of the business will be taxed at a capital gains rate, while the amount you receive under a consulting agreement will be taxed as ordinary income. Additionally, your tax bill will be influenced by how your business was established and whether you’re selling the assets or the entire business.  For example, sales of sole proprietorships and almost all partnerships are asset sales, as well as many corporations and LLCs.

It is critical that you involve your CPA in the sale of your business to make sure to minimize the risk on your end and get the most value from the sale of your business. Some things may not be avoided (you have to pay taxes!), but you can work with a tax expert to establish the best path to take throughout the process. 

Step #5:  Spread the Word

If your business is well-known, word that it’s for sale may be enough. Or, maybe someone close to you (e.g., an employee, friend, customer, etc.) could be a prospective buyer. But, usually, you’ll need to reach out to a bigger pool; this often includes putting ads in newspapers, trade publications and different websites. As mentioned previously, you should work closely with your broker in getting the word out that your business is for sale. 

Step #6:  Negotiate Your Deal

Selling your business will probably be the single most important time to exercise good negotiating skills. Here are some things to consider as you enter into the negotiation process:

  • Don’t begin negotiations until you have a signed letter of intent, you are clear about your own financial objectives and you know the issues that absolutely must be addressed.

  • Be clear about what your negotiation needs to achieve. 

  • Don’t delay negotiations unless it is absolutely necessary. Delays kill business sales, especially during the negotiation process. 

  • Use your objectives as a steering device. If you need to concede on one point, negotiate an offsetting advantage on another point. 

  • Try not to change the larger terms of the sale, such as the price. 

  • Aim for a win-win conclusion; if you don’t, no one will really win and you will more than likely lose the sale. Focus on the end and work with the buyer to make sure all needs are met to the best of your ability.

Step #7:  Close the Sale

There are three key steps that are required when you close the sale of your business: 

  • Sign the Sales Agreement.  All aspects of the sale must be outlined in this agreement. Be sure you double and triple check with your attorney that everything is written prior to signing the agreement. If you have any concerns or questions, do not sign the agreement until they are answered to your liking.

  • Prepare for the Closing.  Make sure you have everything required at the closing of the deal – from paperwork, to alarm codes to keys and customer lists.

  • File Paperwork with the IRS.  After the sale, you and the buyer will need to jointly complete the appropriate IRS and file them with your taxes for the year of sale. 

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