Maybe you’re ready for your first real vacation in years. Or maybe a significant financial upsurge or downturn is signaling that the time is right for you to sell and move on. Whatever your reasons for wanting to sell your business, it’s important to understand that in the weeks and months to come you’ll be spending an extensive amount of time explaining to prospective buyers all the ins and outs of your particular business. Keep these important steps in mind before you begin the process:
Set a Selling Price
Before you sell your business you must determine your asking price. If the price is too high, you may not attract any buyers. If you set the price too low, you may wind up settling for a price well below what your business is actually worth.
There are several methods you can use to determine a selling price for your business. One method is to make your determination based on the value of your company’s assets, plus an additional sum for the goodwill your business has developed. Another method is to investigate what comparable businesses in your region and industry have sold for recently. In some industries there is a formula for determining the worth of a business, such as a value based on the units sold annually or a multiple of average earnings.
Clean Up, Physically and Financially
Another important step in selling your business is to get the premises cleaned up and in order. Of equal — if not greater — importance is getting your bookkeeping “cleaned up” and in order.
Paint a Profitable Picture
You must prepare for a tax burden when you sell your business, with an eye to lowering it if possible. Because taxes can be complicated, it may be wise to get help from an accountant or tax expert. You also may want to consider recasting your tax-return figures for potential buyers. For instance, you may want to add some of your discretionary expenses back to your profits. These might include convention and trade show costs, leased or owned company cars, club memberships, magazine and other subscription services, continuing education costs, salaries and bonuses paid to family members, your medical insurance, and travel and entertainment.
Many of these costs lower your tax bill, but they also lower the bottom line. It is in your interest that the buyer understands these expenses are discretionary, and that eliminating them will help the business show more profit. Recasting your tax numbers is not deceptive; rather, it is a way to clarify for the buyer the true profitability of your business, even though in the past you’ve taken completely appropriate tax deductions for them.
Find the Right Buyer
You may not have any difficulty finding buyers once word gets out that your business is for sale. It’s possible that an employee, a relative, a friend, a supplier, or a customer will be interested in buying. But for many businesses, finding buyers is not quite this easy. In these cases, you can advertise in newspapers, trade publications, and on business-sale Web sites. A business broker may help you reach more buyers and also can help keep information from leaking out too early, but of course brokers get a commission for these services.
Work Out Terms
Once a buyer is seriously interested, you need to work out terms. Some of the key issues include whether you will you sell your business entity or just its assets, and whether you will keep some of the business assets, such as a vehicle. You’ll have to determine if the buyer will pay you in full or in installments. If installments are planned, you need to determine the amount of the down payment and the time frame for paying off the total debt.
Once you have an agreement, put the terms in writing. List all of the assets the purchaser is buying and the value you are giving these for tax purposes, as well as any contracts and leases the buyer is assuming. Make sure that your agreement guarantees you are paid the full price. In an installment sale, it is prudent to require the purchaser to have a cosigner guarantee payment. You’ll want to keep a security interest in the business until you are fully paid. In some cases it may be wise to take a lien on some of the buyer’s other property.
Close the Deal
The meeting at which the business is transferred to the buyer is called the closing. To avoid last-minute problems, you should make a checklist of all the papers you are bringing to the closing and those that you expect the purchaser to bring. While every sale is different, there are common documents and items that are usually needed at closing:
- Access: alarm codes, computer access codes, safe combinations, etc.; keys to file cabinets, premises, and vehicles.
- Asset Allocation Statement (IRS form 8594)
- Bill of sale (or transfer documents) for real estate, vehicles, business license
- Consent of entity owners to sale of assets
- Consulting and employment contracts; Covenant not to compete (noncompetition agreement)
- Customer lists, mailing lists, supplier lists
- Escrow agreement for post-closing adjustments
- Insurance certificates for the policy covering secured assets; Title insurance commitment
- Mortgage or deed of trust
- Owner’s manuals for business equipment
- Promissory note
- Security agreement
- Statement regarding absence of creditors
- UCC financing statement
After Completing the Sale
Once the sale is completed, you and the purchaser must fill out IRS Form 8594, Asset Acquisition Statement. This should be filed along with your tax returns for the year in which the sale occurred. Fill out the form with the buyer, assigning the purchase price among the purchased assets and classifying these according to the assorted IRS categories. You should each file duplicate copies of the form.