How to Structure the Sale of a Business: A Guide for Small Business Owners
Small business owners who finally decide to put their business up for sale are often clueless of where to start and what to do. By not preparing ahead of time, they’ll miss out on attracting buyers, selling at the best price and arriving at the fair deal terms.
There are a few reasons why business deals fall apart, especially for small businesses. For example, many sellers are just too complacent at the negotiating table. Just because your business is doing well, it doesn’t mean that preparing the structure of the sale isn’t necessary.
With more and more criteria being looked into by business buyers these days, the health of your financial statements is just one item on their checklist. Eventually, you’ll be caught by the strains of your complacency and won’t be able to find a buyer with a good deal.
Another factor that affects the result of the deal is the failure to identify existing liability issues. These could very well weaken the structure of the sale and would get you nowhere in the process.
With a definite structure on selling your business, you’ll increase your chances of closing the deal and eliminating the risks of bombing your negotiation offer.
Structuring the Deal
For whatever reasons you are selling; retirement, burnout, new opportunities, partnership conflict, personal financial needs, economic slowdown, or career switch, a business sale cannot be successful if no structured deal is in place.
What factors should you consider when structuring your deal?
The type of business structure affects the method of control that an owner has on his or her enterprise, tax obligations and legal liabilities. For instance, sole proprietors are personally liable for the business debt while in S-Corporations, stockholders are typically not accountable for business debts incurred.
Type of business sale
What sales option is the most appropriate for your deal? In an asset sale, tangible (real estate, equipment, inventory) and/or intangible (copyright, trademark, patent, IP) assets are included. Small businesses, being sole proprietors or partners, use this type of sale because there are no share certificates of ownership that need to be transferred.
Share or stock sales, on the other hand, involve the selling of the shares instead of the business assets. Only incorporated businesses can opt for such arrangement though. When the deal is closed, it is common that the previous owner is cleared of the liabilities that come with the business.
When your small business is sold, tax obligations would also have to be met because, by law, such sale brings in income. This depends on the profit from the sale in the form of capital gains tax.
However, no seller would obviously want to pay higher taxes. A CPA or registered accountant can best advise you on tax strategies when selling your business.
An all-cash deal is made by the buyer if he can finance the entire purchase price. In most cases, a lower amount is offered since both parties can save on the costs of other obligations and the reduced risk of the transaction.
However, not all interested buyers can finance the deal. Through seller financing, the original business owner will be extending a loan of anywhere from 10 to 80 percent plus interest of the purchase price so that a portion of the total price can be covered. This is also known as seller carry back or owner financing where the buyer will be required to present proof of good credit standing and collateral, in some cases.
An earn-out arrangement is made when the buyer pays the original owner after a certain number of years as long as the conditions of the business achieving similar earnings is met.
For instance, a buyer pays $100,000 up front and then promises another $100,000 should the business earn $500,000 in gross profit in the next three years. If the goal is not met, then no additional payment is “earned out” by the seller. This is done to make sure that the seller’s interests is in accordance with the company’s future.
The seller may also own part of the business through recapitalization. In this arrangement, the original owner or the buyer may hold majority of shares.
Finally, a management buyout can be made if the entire management team become the new owners of the business. This is typically done to ensure that the employees are retained and the new owners are already knowledgeable about the business.
Most arrangements involve the seller to act as a consultant to the new owner when the business changes hands. This is especially true during the critical period of the transition.
Checklist When Selling Your Business
Now that you have the following factors above carefully considered, the next step is to ensure that you won’t miss a step in the entire process:
Have you scheduled your closing date that is agreed by both parties?
Is the purchase price a mutually agreed value?
Do you have all document, forms (local, national and IRS), bill of sale, succession and personal agreements, warranties and representations, closing sheet and purchase and sale agreement prepared at least a week before the closing date?
Are there other documents in the sale that is required from you?
Is the insurance coverage detailed in the purchase contract?
Are you fully aware of the tax and legal obligations in the sale?
Do you have all your assets listed so that the transfer can be facilitated in the sale?
Have you gone through the purchase and sale agreement to spot any gray areas?
Are there additional adjustments after the sale?
When structuring the deal, buyers and sellers need to find the best arrangement to maximize their returns and reduce the risks. Buyers, for instance, must perform due diligence to assess whether or not the business is profitable and that no existing liabilities can derail his management.
Sellers, on the other hand, must learn how to prepare well for deal by structuring the deal properly. This involves looking into factors such as business structure, taxes, financing and plans after the sale among others.
To better improve the outcome of the deal, finding the correct value of the business is critical. We work with entrepreneurs to achieve remarkable results, whether that’s exponential growth or an exit event. You can get a free business evaluation score with our Value Builder System.
Brett Pittsenbargar is a savvy business investor and turnaround strategist dedicated to assisting business owners reach their objective at every growth phase. With a background in business development and investment experience, Pittsenbargar understands that business is much more than written contracts, it is about the people working every day in the business that matter most for small and medium sized enterprises generating $1-20 million in revenue annually. He invests in, mergers and acquisitions, growth partnerships, cash out purchases and adding shareholder value.
Consult with a seasoned business investor that has decades of experience helping small and mid-sized businesses. A business strategist who can work directly with you in developing exit strategy plans, partnering growth partnership, building shareholder value and organizing mergers is critical for your business. Contact Growth Point Holdings today to arrange a one-on-one consultation with a dedicated business strategist to start building a synergistic long-term business relationship together.
Disclaimer: This article is intended to give you general business information, not to provide specific legal or financial advice. Be sure to consult your attorney, accountant, and financial professionals for any specific questions relating to your business.