Top 10 Things to Consider When Selling Your Business

July 9th, 2009 · No Comments

You’ve worked several decades building your business and now you’re ready to move on.

You want to lower your handicap to a single digit, read the complete works of Homer, Virgil and Shakespeare, and see the rest of the civilized world.

But wait, before you put your business up for sale here are some things (in no particular order) you should know:

1. Asset or Stock Sale - This question is generally less critical for the seller than it is for the buyer.

When a Buyer acquires a business by purchasing the outstanding shares of the Company the business entity continues its existence without interruption. The only thing that changes is the ownership.

This means that all liabilities remain with the Company, even those liabilities that may be contingent or undisclosed at closing. Corporate shares are capital assets and if held more than 1 year are taxed at lower (at least for now) capital gains rates.

The great majority of business sale transactions we handle are Asset Sale transactions where the Buyer chooses which assets he wants to buy and which liabilities he is willing to assume. Most of the assets of a closely held business are capital assets. The most common exceptions are inventory, accounts receivable and cash and cash equivalents.

2. Employee Retention – One of the most important “assets” you have to sell is the training you’ve invested in your long term employees. If these individuals stay on, the likelihood of the Buyer continuing or improving on the historical success of the business is greatly increased.

The flip side of this (assuming you care about your long term employees’ futures) is that you’ll want to minimize the chances that your former employees will lose their jobs as a result of the sale.

3. Vendor Relationships - Similarly, you will want to convince the Buyer that the company under the new ownership will get the same credit terms and discounts from it’s vendors and suppliers that it got when you were the owner. You spent time and money nurturing these relationships and that should be factored into the purchase price as well.

4. Non-Compete Agreement - Most Buyers will want to ensure that the Seller doesn’t open up a new business or join an ongoing business that will compete with the one he just purchased from him. This is done through the use of a Non-Competition Agreement (”NCA”) which defines the geographic boundaries and duration of the NCA.

The broader area restricted and the longer the duration, the more difficult it will be for the Buyer to have the terms of the NCA enforced in a court of law. NCAs have value and their existence should increase the purchase price. Amounts allocated to the NCA will be considered ordinary income to the Buyer in the year received and the Buyer must amortize them under Section 197 over a period of 15 years.

5. Indemnification and Hold Harmless Clauses - This clause is a must to protect the Buyer from the existence of any liabilities undisclosed by the Seller during negotiations up through the closing.

6. Consulting Agreement - Buyers often want the owner/seller to stay on as a consultant for a specified period after the closing to help with the transition. The Buyer could be paid as an employee during that period or as an Independent Contractor. Payments received by the Buyer are ordinary income and payments made by the Seller are ordinary and necessary business expenses assuming that the allocation to the consulting agreement is reasonable based on the nature, quality and quantity of the services to be rendered.

7. Allocation of Sales Price - With certain narrowly prescribed exceptions, Buyers and Sellers in Asset purchase transactions are required to complete Form 8594 – Asset Acquisition Statement which shows how the purchase price has been allocated among several classes of assets.

The parties and the IRS will be bound by the allocations made on this form if the Buyer’s and the Seller’s positions with respect to a specifically allocated item are adverse (i.e. if one party obtains a tax benefit as a result of a specific allocation and the other party experiences a tax detriment.)

8. Unpaid States Sales Taxes - Most states have statutes that allow them to collect unpaid sales taxes from the buyer of a new business. In effect, this puts a burden on buyers to ensure that there are no outstanding state tax debts before they purchase the sellers’ assets. Proper pre-closing due diligence should reveal the existence of these liabilities, but for some reason they are frequently missed. If these liabilities are undiscovered prior to closing, they are usually covered by the Indemnification and Hold Harmless Clauses discussed in number 5, above.

9. Owner Versus Third Party Financing – Time and again we have seen a Seller finance the sale of his business and never receive full payment of the purchase price. We therefore recommend that our selling clients try to sell to buyers who can obtain financing from a third party.

Remember, just because you were able to run the business successfully, doesn’t mean the new owner will be able to repeat your successes. And if the business starts going South, you can bet your first born son that the Buyer will blame you for selling him a lemon. And that, my friends, will be all the excuse he needs not to pay you the balance of the purchase price.

Of course, the balance he owes you will be secured by a lien on the assets of the business, but the value of these assets will probably have been substantially diminished by the time you foreclose on them. And even if they haven’t lost their value, you don’t want the business back anyway. That’s why you sold it to begin with.

Stay away from Seller financing if at all possible.

10. Intangible Assets - In many cases – especially with respect to non-asset intensive service businesses – the bulk of a business’ value will be vested in intangible assets that are not reflected on the books. These assets include, but are not limited to: