Why are you building a business?
In addition to providing yourself employment together with the flexibility, control and responsibility of business ownership, most people build businesses to sell them at a gain in order to retire or to build another business.
How should you document the sale of your business?
There are primary two ways to sell your business. You can sell the assets or you can sell the equity (typically stock, LLC membership interests, or partnership interests). These are documented quite differently and can have completely different tax benefits to the parties. Additionally, a question that needs resolved is whether continuing liabilities of the business remain with the seller or become the obligation of buyer (typically documented by an indemnity from seller).
How do you expect to get paid?
- Over time: It is atypical (not impossible though) to be paid 100 cents on the dollar for the sale of your business. Typically, buyers insist that you carry a portion of their purchaseDocumenting the collateral that seller takes in exchange for the carry back and agreeing upon any earn outs or minimum profit thresholds are complicated.
- At closing: If the value of the business is quite substantial, and there are sufficient types of collateral that can be pledged to a lender (meaning that not much value is attributed to goodwill or noncompetes from seller), a third-party lender might be willing to loan with a sufficient down payment from buyer.
To whom will you sell your business?
There are three primary parties who are potential purchasers of your business:
- Employees; and
- Third parties.
Each of these options has separate challenges.
Selling to family has the challenge of negotiating what should be an arm’s length transaction, using typical negotiating strategies, with family who might be your siblings or children.
Selling to a group of employees, other than the sale to an associate professional (such as is traditionally done by physicians, veterinarians and dentists), may require expensive and complicated tax work.
Selling to third parties has the risk of breaches of confidentiality or attempted theft of your business ideas, clients or employees.
After reading this….what if you want to sell anyway?
You should consult your trusted team. This should include at a minimum your lawyer, your CPA and your financial advisor. It might also include your insurance agent. It’s very important that confidentiality be maintained, so you should emphasize this with your team and only use trusted advisors.
By: Guest Blogger Mary J. Drury, Esq.