Selling a Business – Start the Process Now! Part 1: Strategy

This article is Part 1 of a 2-part series focusing on selling a business.

Sales of business are strong! In recent years, privately owned business account for almost 70% of these transactions.

Most business owners do not have prior experience selling a business.  In many cases, the selling a privately owned business is the single largest financial transaction in a business owner’s life. Frequently, the owner wants to cash out in order to have money available for retirement.

A business is a non-liquid asset and selling a business is a complex process. Sellers are often confused about the market for their business. In most cases, selling the business to a third party is the best way for the business owner to achieve his or her goals.

It takes significant planning and preparation to successfully exit a business.

Timing. The best time to sell a business is when the business is doing well. What do you need to get out of your business? What are your retirement needs? What will you do once you sell your business?

Buy-Sell Agreements. If you have a partner, do you have a succession plan or buy sell agreement in place so the business or the other owners can reacquire the ownership interests of the person who leaves the business? The departure of a business owner can be one of the most disruptive events to a small business.

Price. It is very common for business owners to think their business is worth more than it really is. What kind of return on investment do buyers expect and what returns can your business deliver? Have you had your business valued? The general economic outlook and the growth projection for your industry affect both the sales price and the time it will take to sell your business.

Buyers. Potential buyers may be a competitor, a third party, employees, or family members. Oftentimes a competitor knows the market and understands the business, so he may better appreciate the value of your business. He may see the acquisition of your business as an opportunity to expand and offer you the best price for it.

Understand the Market. Research the marketing trends in your industry. Potential buyers frequently are looking for growth potential, and want to invest in an emergent market or business. These projections will significantly affect your selling price and provide insight into the probable time it will take to sell your business.

Structuring the Deal. Buyers generally prefer an asset purchase, in which they purchase substantially all of the assets of the business and do not assume seller liabilities. Keep in mind however, that there may be important reasons, such as maintaining existing contracts, permits or licenses, for the transaction may be structured as an entity purchase, in which the buyer purchases the sellers’ ownership interests in the business.

Seller Financing. Buyers frequently expect sellers to offer some amount of seller financing. A buyer may also insist on certain arrangements, such as an earn-out agreement, a revenue sharing agreement, or a hold-back, to help ensure that the business will perform at its existing level.

Tax Issues. Analyze and understand the tax consequences of a potential sale. The seller will be taxed on the profit he makes from selling the business. The buyer and seller must reach an agreement on the allocation of the purchase price to the specific assets the buyer acquires. If the parties structure the payment of the purchase price over an extended time period, the seller may be able to defer some of gain on the transaction until payments are received.

Ongoing Obligations.   Frequently, the buyer will need help during the transitioning period when he starts running the business. It is also very common for the buyer to require that the seller agree not to compete against the business for a certain period of time. In addition, the seller usually is required to make certain representations and warranties and indemnify the buyer for certain liabilities.

Selling a business is a complex transaction. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or kathy@tremmellaw.com.

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