You set a realistic sales price, your business received a much needed sprucing up and you understand the tax consequences you incur when selling your business. Now let’s go find a buyer!

Finding a Qualified Buyer

A successful business broker provides an excellent source for finding potential qualified buyers. Business brokers assist in advertising your business and finding potential buyers. You too should put out the word in as many different ways as possible. Tell friends, employees and customers that might have an interest. Newspapers, business trade publications and web sites that offer businesses for sale all hold the potential of bring a buyer. While all these sources get the word out, a good business broker knows how to qualify and prepare the right buyers for a sale.

Be Prepared for Negotiation

Each buyer presents special needs and possible special requests. Be prepared with opportunities for financing at least a portion of the sales price and possibly accepting a lower down payment or the pay off of the down payment in installments in exchange for a better asking price. The buyer may not want to purchase all assets of the business or may want to purchase assets you weren’t planning to sell.

Document the Sale Terms

A sales agreement documents the terms reached with the buyer, providing all the agreed upon terms. The sales agreement should include the sales price, payment terms, a list of all assets and liabilities of the business to be included in the sale and what constitutes a default in the contract. Include a list of all contracts and leases and the terms of assuming each. Seek the advice of a competent business attorney, ensuring the sales agreement is reviewed for covering all your bases and legally binding.

Closing

The closing meeting transfers your business to the buyer and the agreed down payment to you. Provide complete inventories, copies of leases and contracts being assumed, contact information for employees, lessors and employees, customers, keys, alarm and safe combinations and a myriad of other information the new buyer needs to successfully run his new business. The buyer’s success secures full payment.

File Paperwork

Depending on the type of entity you sell, you may need to file documentation with your county or state. Also complete IRS form 8594, Asset Acquisition Statement, with the buyer and file with your tax returns for the year of sale.

Today’s economy demands those selling businesses be savvy and carefully do their homework before putting their business up for sale. The good news; just because it’s more difficult to sell a business in a slowing economy, it’s certainly not impossible.

Understand Tax Consequences

Probably the biggest favor you do for yourself involves understanding the tax consequences of selling your business. Taxes wipe out a huge gain when a business sells, so the owner best seek advice of an accountant years prior to actually selling a business. Your accountant may offer tips for lessening the tax bite.

The legal entity you choose for your business impacts the tax consequences and whether you sell the entire entity or merely the assets of the business.

Set a Realistic, but Negotiable Price

Pricing a business offers a conundrum because the owner wants every penny he can get for the sweat he’s put into the business; and the buyer wants the business as inexpensive as possible. If the seller prices the business to high, potential buyers may pass the business by without a good look; if the seller prices the business too low, he loses money.

Various methods exist for pricing businesses and using a combination at least for comparison usually works the best. First, look at the fair market value of the business assets, pricing them as belonging to a going concern versus a fire sale. Add a fair price for Goodwill built into the business which benefits the buyer. Compare these combined figures with comparable businesses for sale in your region and possibly make up or down adjustments. Some derive business based on a profit ratio over a period of years, such as five times net income. Again, the best approach looks at each of these pricing factors and takes a overall view for developing the sales price. Leave some room for negotiation.

Curb Appeal

A good outward appearance sets the tone for the sale. New paint, trimmed and spruced landscape, fixing the broken items ignored over the years adds value. Remember, what the buyer sees at the curb sets a strong impression.

If your business provided special benefits (health insurance, gym memberships, travel and entertainment, bonuses paid, etc.), your accountant may want to add these items back in to income when showing years of profit and loss statements. This is neither illegal nor deceptive since the new owner wants a realistic concept of the earning power of the business.

More tips for selling a business in our next post

Considering Liability, Ownership and Taxation (LOT), business owners choose the legal form of their business entity. Choices for typical business entities are: Sole Proprietorship, Partnership, Limited Liability Company (LLC), S Corporation, and C Corporation.

Sole Proprietorship

As the name implies sole proprietorships mean one owner. A sole proprietorship requires no legal documentation; setting it up is sweet and simple. The owner reports business revenue and expenses on Federal Income Tax Form Schedule C with all net income being passed to and taxed on the sole proprietor’s personal tax return.

Note that simplicity comes at the cost of shelter from personal liability. The owner receives no protection of personal assets in this form of legal business entity. If a customer of the business decides to sue, they sue the sole proprietor. This puts the owner’s personal assets at risk.

Partnership

Two or more people are the business owners and take an active role in daily management of the business. Each partner may split the profits in equal or unequal shares depending on the partnership agreement. All profits pass through to partners each year. Partners should ensure a legal document exists outlining the details of the partnership.

All partners’ personal assets risk exposure to law suits for the actions of any one or more of the partners. If you want a risky form of business, this is it!

Limited Liability Company (LLC)

The LLC provides small businesses protection for owners’ personal assets while also allowing a simple legal entity. Limited Liability Companies do require legal documentation best drawn up by a lawyer practicing corporate law. Many states require the filing of the LLC documentation, annual meeting minutes and an small annual filing fee.

Profits pass through the LLC to owners of the company and can be in equal or unequal shares, depending on agreement of the owners. Check your states rules for exact terms of an LLC since LLC rules differ by the state in which you operate. The number of owners and the citizenship of owners may change based on your state.

S Corporation

The S Corporation is another favorite legal of entity of small businesses as it also allows for personal asset protection for all owners. S Corporation business form existed much longer than LLCs (relatively new to the legal entity form) but have some advantages for larger small businesses. Not all profits have to be distributed to owners every year.

The documentation and income tax rules for an S Corporation are more complicated but allow for the existence of the business for a short period of time if the owners die. As with Limited Liability Company’s, S Corporations must file annual reports. Use both an experienced attorney and CPA if you choose this business form as the requirements are rather strict.

C Corporation

Publicly traded companies usually take this legal form. Owners and investors receive personal asset protection and the corporation can choose how much if any of the profits to be distributed to owners.

As with LLC’s and S Corporation annual filings and annual meetings are required. Each state determines rules for C Corporations incorporated in their state. A C Corporation may form in any state but is required to have a registered agent (for receiving legal notices) in each state in which they operate.

Regardless of the entity you form, giving those with whom you do business is necessary for asset protection. So if you choose an LLC, S Corporation or C Corporation, make sure your business discloses its legal form and meets all state requirements.

Check with the Professionals

Remember the information presented here should not be taken as legal or tax advice. Check with your attorney and accountant for how these forms of legal entities may affect your business situation.

As a new business owner, one of your first decisions requires determining the type of business your business will be. The type of business in this discussion refers not to the products and services you sell but rather the legal form of your business. It means choosing the correct legal entity for your business that fits the level of protection of assets, determines how your business income will be taxed and who can invest in your company.

Consider these three items when choosing the legal form of your business:

• Liability – Every business owner faces certain types of liability from the products and services they offer. The amount of risk depends on what you sell.
• Taxation – Certain types of businesses face double taxation for the owners. The business profits are taxed and then any profit distributions are taxed to the individual(s) receiving the income.
• Ownership – The legal form of your business determines how many people can have an ownership (investment) in your company.

Note that a business may change its form of business, so choosing a sole proprietorship today doesn’t prevent a super star business from becoming a corporation in the future. There may be some legal hoops, but it’s possible to change business entity forms.

Attorneys and Accountants

Don’t try cutting corners believing that a small business doesn’t need or can’t afford the advice of an attorney and accountant. Appropriate professional advice saves costly mistakes.

Next we discuss various types of business entities.

The last couple of days, we discussed starting a new business and some factors for consideration in purchasing an existing business. Now that you selected the business and negotiated a price the seller accepts, you get your financing in place. Preliminary plans for financing hopefully took place prior to negotiation for purchase. Having some financing committed makes purchase negotiations easier. See our previous articles about financing.

So now let’s finalize the sale!

The business property should be appraised by a commercial appraiser and of course the purchase price should not exceed the appraised price. At the end of negotiations the seller customarily receives a signed Earnest Money Agreement from the buyer. Both the buyer and seller sign a purchase contract and agree to a closing date when title of the business passes from seller to buyer.

The actual closing passes title and exchanges either money and/or a promissory note unless the sales contract specifies a contract for deed sale. Your attorney should review all documents prior to closing. The buyer’s attorney takes care of financing paperwork, leases, licenses and permits for the new owner and will advise you of necessary documentation for government authorities.

You may also need to sign for a lease of the premise if the premise is not part of the sale. Make note and begin the application process for any licenses or permits needed when you take over the business. Apply for the appropriate documentation such as an Employer ID number and bulk sales. Fix a day for a final inventory, final accounts payable and accounts receivable and inspection of the business. If the purchase takes place with a business broker, the business broker assists you in making sure all paperwork is on track and in hand at the closing.

The seller’s attorney draws up any necessary leases between seller and buyer, any promissory notes between seller and buyer, disclosing all liabilities and liens, documentation of accounts payable and receivables and provides the inventory.

Once you take over the business, remember to change all the locks so any outstanding keys don’t become a concern. Notify all employees and suppliers of the change in ownership and make sure your licenses and permits are all in order prior to commencing business.

As a business owner, welcome to a whole new world of challenges and rewards!