Sell business
To sell your business on optimal terms, you must attend many practical and financial details. You must, for example, determine a realistic price for your business, prepare your business for a sale, find the right buyer and negotiate a sales agreement. If you have never sold a business before, the multitude of tasks may feel a bit overwhelming. But do not worry.
It's crucial for you to learn how to build appropriate legal protections into your sale. To that end, this chapter will emphasize the legal measures you can take to protect your financial interests throughout the sales process. For example, if you sell your business on an installment basis, you will want to craft a sales agreement and other legal documents that reasonably assure that you will receive all remaining payments from the buyer and that you can take back the business if the buyer stops paying you. Likewise, you will want to make sure you do not get stuck with liability for business debts that the buyer incurs.
Figuring out what your business is worth:
Before you go through the effort of preparing your business for sale, you will undoubtedly want to have a good idea of how much it is worth.
Just from talking to others in your industry or from articles you read in trade publications, you may already have a pretty good ballpark idea of what a business like yours is worth. But your seat of the pants notion of your business's value may also be wide of the mark. At the very least, you will want to refine it based on a convincing method that you can later use of motivate a skeptical buyer to pay your price.
And, of course, there are other reasons why it's crucial to estimate your business's value accurately. If you set your price too high, you may be disappointed to find that potential buyers are scared off ; with the result that word gets around that your enterprise is of little interest. By the same token, if you set the price too low, a savvy buyer may try to snap up your business at your bargain basement discount. And this means that unless you suddenly try to raise the price mid-negotiation something that can be tough to do you will end up selling your business for less than it is worth.
Pricing a business is both an art and a science. There are several methods you can use valuing the assets, basing your price on comparable sales, calculating return on investment, or using an industry formula based on sales or units. Whatever valuation approach you employ, you will probably end up with a range of values rather than one absolute number. And always bear in mind that while it is essential to set and be able to defend a price for your business, in the last analysis, the number you name will not be nearly as meaningful as the one a willing buyer agrees to pay.
Preparing your business for sale:
If you were planning to sell your car, you would probably do a number of things to make it more appealing to buyers. Especially if you were determined to get top dollar, you would want to tune the engine, tap out the dents, replace the worn floor mats, give the car a good wash, and wax it.
You will want to go through an analogous process in preparing to sell your business but the task inevitably will be more complex and prolonged. In addition to making sure the physical assets of the business are clean and attractive, you will need to attend to less tangible matters, such as the financial picture you will present to buyers. In the time you have before you put your business on the market, this will typically mean taking sensible steps to reduce expenses while also doing all you can to increase gross and net income.
The key legal issues in selling your business:
In addition to understanding and mastering the key practical steps involved in selling your business, you need to pay close attention to a whole slew of legal issues. Failing to do so means you are at risk of receiving far less money than you bargained for. For example, let us say the buyer agrees to purchase your business on an installment basis a very common arrangement and after a year or so simply stops making payments. If you did not anticipate and address this possibility in your sales documents, your only recourse may be to sue the buyer who may have become insolvent. There are a number of techniques you can use in putting together your deal to help avoid this grim outcome. For example, you can retain a security interest in the business, which will at least let you take back the business even though it may have declined in value under the buyer?s ownership. Or you can retain a security interest in the buyer?s home or other real estate through a mortgage or deed of trust so that you will have an additional resource to tap into if the buyer stops paying you.
If, as part of your sale, the buyer assumes the legal obligation to pay past business liabilities and shield you from them, you will want to include wording in the sales agreement that makes the buyer's commitment as clear and as legally binding as possible. This is especially important if your business is a sole proprietorship or partnership, since in these cases you are personally liable for business debts.
The sales documents must also cover your relationship to the business after the closing. This can include spelling out the kinds of services you will provide to the new owner as a consultant or independent contractor. And if you will be severing your relationship to the business you are selling, but may someday want to work in a field related to that business.
Tax considerations when selling your business:
To intelligently negotiate a sale of your business, you need a reasonably accurate idea of how much federal income tax you will owe. Your tax bill may be quite substantial if you have owned your business for a while and it has increased in value over the years. This chapter summarizes the federal income tax principles that apply to a business sale.
The rules for computing the tax on the sale of a business can be extremely complex, often creating a far bigger headache than you have experienced in preparing your typical tax return each year. So seek good tax advice early in the sale process. If you wait until after you reach an agreement with a buyer, you risk missing out on tax saving opportunities or selling at a price that turns out to be disappointingly low because it does not adequately reflect your tax liability.
Putting a price on your business:
A key task in selling any business is deciding how much it is worth. Price your business too high and you will scare off potential buyers. Price it too low and you will leave money on the table. But if you hope for precision in pricing your business, you will be disappointed. No pricing formula, expert estimate, or clairvoyant can accurately provide a sales figure that is exactly "right". So while you need to price your business sensibly, you will not know how much it is really worth until the day a buyer writes you a check.
Still, even though you can not know in advance exactly what your business will sell for, you can arrive at a reasonable asking price. Start by taking all relevant valuation information into consideration to identify a range of possible sales prices. Depending on your business, the low end of the range will probably be little more than the liquidation value of the physical assets. The high end is likely to be based on income projections and what an enthusiastic buyer might pay for the right to receive those earnings in the future. If you have a healthy business especially one with a well established customer base and positive reputation you will probably pick an initial asking price towards the top of your range and then, if necessary, be prepared to back off a bit in negotiating the final price. In pricing your business, you will need to take into account the general economic climate, as well as trends in your industry whether positive or negative. And, of course, if you have to sell quickly, you may be required to settle for less than you would receive if you could take your time.
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