Building a successful business takes years of effort and attention. Having expended plenty of blood, sweat and tears over that time, business owners want to maximize their value when selling.
First, determine why you are selling and what your priorities are. Do you want to hold out for an all-cash sale, which may be harder to successfully negotiate, or are you willing to consider an installment sale or taking equity in the acquiring company? Do you have a minimum price determined by factors other than the business’ value, such as your retirement plans? Do you want to preserve jobs of family members or long-term employees?
Look for advisers who have relevant experience and vet them thoroughly. Make sure your experts have no potential conflicts of interest. Consider hiring an accountant, a tax expert, lawyer, an appraiser or valuation expert, an investment banker and an intermediary or broker. Not every business sale will require all of them, but you will at least need an accountant, lawyer and an intermediary.
The broker or intermediary can be the point person for identifying and working with potential buyers. The accountant/tax expert will help you get your books in order and consider issues such as how to allocate the business’ purchase price most effectively and how to deal with federal, state and local taxes. Legal counsel will draft and review the documents and agreements necessary to complete the sale.
Many lawyers and other advisers will expect you to sign retainer agreements up front. This can mean a substantial outlay of money at the start. If your business is very small, you may have trouble finding a broker. For very large businesses, you can hire an intermediary, who functions as a consultant and offers more sophisticated services.
You may also want to obtain an objective third-party valuation. This will give you a realistic idea of your business’ worth.
Many prospective buyers want to see books prepared according to generally accepted accounting principles (GAAP), which most small businesses do not use. The process of converting a business’ books to GAAP can be a significant undertaking and should be addressed early.
The process of selling a business can be protracted. Ensure your business continues to operate effectively. The sale can occupy a large chunk of your attention if you are not careful. Do not neglect day-to-day operations.
Play it close to the vest. Widespread knowledge the business is for sale can create anxiety among employees, customers and vendors and can reduce the value.
Once you or your broker has identified a prospective buyer, prequalify the candidate. Secure confidentiality or nondisclosure agreements. Serious buyers should not have problems agreeing to such terms; if they resist, it’s a red flag.
The prospective buyer should offer a letter of intent, which is a nonbinding offer outlining all the major terms of the proposed transaction, including the total purchase price, the structure and all other important conditions.
Do you want to structure the sale as an asset or a stock deal? Generally, buyers prefer to purchase assets because they can obtain a step-up in basis, resulting in enhanced tax deductions in the future. Buyers also limit their own risk in an asset sale. Sellers generally benefit more from a stock sale because they obtain clear, long-term capital gains treatment by doing so. In many cases, the structure of the business dictates the tax treatment of the sale. For example, the sale of a sole proprietorship is always treated as an asset sale.
Allocating the purchase price among assets is often a key part of the negotiation process, as buyers and sellers may want certain assets treated differently to receive the most favorable tax treatment. Buyers might want more of the purchase price allocated to hard assets, which they can depreciate, as opposed to intangible assets or goodwill, which generally must be expensed over longer periods of time. Sellers want the opposite. Both parties must agree on the final allocation, as the buyer and seller will both disclose this in their tax filings with the IRS.
David Walters heads the Portland, Oregon, office of Scarsdale-based Palisades Hudson Financial Group (www.palisadeshudson.com), a fee-only financial planning firm and investment adviser. He is a contributor to Palisades Hudson’s recent book, “Looking Ahead: Life, Family, Wealth and Business After 55.” He can be reached at 971-240-4533.