Selling Your Business
Contents
- 1. How do I determine the value of my business?
- 2. What steps are there to selling my business and deciding on a buyer?
- 3. Preparing for the sale:
- 4. How can I decide whether to sell my business or pass it on to family members?
- 5. What are the major steps in closing the sale of a business?
- 6. What tax consequences are there to selling my business?
If you intend to sell your business in addition to the real estate, you will need to determine the value not only of the real property but also of the business itself.
How do I determine the value of my business?
There are business appraisers available to assist in making the valuation determination and many are CPAs. You may want to get the opinion of more than one appraiser. The appraiser's valuation report will provide credibility to potential buyers that the price you are asking is realistic.
To roughly estimate the value of your business on your own, consider:
- For an established business with steady revenue and strong market position and whose continued earnings are not dependent on an individual or specific management personnel: use a multiple of eight to ten times current profits.
- For an established business with good market position but with some competition and some variability to earnings and which requires continual management attention: use a multiple of five to seven times current profits.
- For an established business with no significant competitive advantages, strong competition, few hard assets and a heavy dependency on management's skills for success: use a multiple of two to four times current profits.
- For a small personal service business where the new owner will be the only, or one of the only, professional service providers: use a multiple of one times current profits.
What steps are there to selling my business and deciding on a buyer?
Decide whether you want to sell your business as well as your property:
- Clarify what you will do with your life after the business sells.
- Discuss with legal counsel and an accounting professional the legal, tax and accounting ramifications of the sale.
- If you have a partner or shareholders, determine how a sale will impact them.
- Prepare a write-up covering the essential facts of your business and its likely future.
Valuing the business and deciding on a buyer:
- Carefully consider where you set the valuation of your business and the price you ask-overpricing your business will narrow the pool of potential buyers and may result in the deal falling apart.
- Make sure to include a figure for the goodwill you have built up in your company.
- Determine when the best time to sell will be.
- Investigate your potential buyer to determine the buyer's ability to finalize the sale, make promissory note payments and avoid a future default.
Preparing for the sale:
- Be available to answer questions and offer assistance to facilitate the sale and also to answer technical questions about your processes.
- The buyer likely will make the sale contingent on a thorough investigation of your financials, business practices and assets. Do not try to disguise or hide the problems of your business but do highlight all of its features.
- Consider your exit strategy and how it impacts the business and new owner.
- Understand the disclosures that you must make and when and how to disclose.
How can I decide whether to sell my business or pass it on to family members?
Some signs that it is time to sell, versus pass on, a family business include constant tension among family members and no plans for succession or retirement of the founder or leader of the business. If the "next in line" relative has no formal business training and other family members are not well-utilized in the business, then the family's ability to run the company may put it in jeopardy. Compensation to a family member may be unrealistic.
What are the major steps in closing the sale of a business?
First, a letter of intent is entered into that summarizes the price and terms that have been negotiated and provides for the confidentiality of the transaction and continuing investigation. Conduct due diligence: the seller investigating the buyer's financial soundness and the buyer investigating the business. The buyer will need to obtain and coordinate financing.
Draft and finalize the purchase agreement together with any additional agreements, such as a noncompete agreement or consulting contract. Legal counsel will provide compliance with laws regarding notification to creditors, stockholder vote, tax payments and more.
Sign the purchase agreement and other contracts to transfer ownership and secure the deal including any promissory notes. The down payment is made, and possession of the business is then turned over and any third-party documentation, such as for lenders, is completed.
What tax consequences are there to selling my business?
The sale of business property may generate taxable capital gains or deductible losses. In addition, there may be other tax consequences, such as a depreciation deduction, from the sale. Often, the sale of small business property may be reported on an individual's Form 1040. Consulting a tax attorney is advisable, as the attorney may help you minimize the taxes owed or may have methods to defer a portion of the tax payment.