A Practical, Strategic Approach To Selling Your Business
The decision to sell your business is often difficult. As a business develops and as owners age, developing a strong exit strategy takes time and thoughtful preparation.
At AEGIS Law, we provide careful, customized guidance throughout the process or selling your business. We understand the time, effort and resources that you put into your business and understand how critical the right exit strategy is. With over 25 years of experience, we pride ourselves on offering practical, strategic legal advice to Florida sellers and buyers.
Key Considerations For Small Business Owners
For many small business owners, the business has no real value without the active participation of the owners, making selling the business very difficult. However, when a business owner starts planning early, a transition plan to family, a loyal and reliable employee or a competitor may be very lucrative. Some considerations:
- Do you have partners who can keep operations running after you retire?
- Is there a buy-sell agreement?
- Is there a competitor or strategic buyer available?
- What is your business worth?
- Can you make more money running the business versus selling the business?
- What are the tax ramifications of a sale?
- Are you available to consult and assist with the transition after sale?
- Are you ready for due diligence?
- Are your financials a true picture of the business operation without you as an owner?
We strongly recommend that business owners know what they want and what to expect. Selling a business can be like separating from a child you nurtured. At other times, it is a true relief of burden. It is most important to understand what your business is worth and what to expect to receive as a fair purchase price.
Arriving At An Accurate Assessment Of Your Financial Picture
Very often, a close corporation owned may have financials that do not reflect true business capacity. This is often because the owners have generous expense policies and distributions to owners. As a result, the business shows almost no profit, supported by tax returns that show no profit year over year.
This can become an issue when it is time to finance the business or sell it. To normalize the financials, a seller must review all expenses outside the ordinary course of business and distributions to owners. They must then determine if such items would occur if a third party owned the business.
Once these expenses and distributions are removed, add in the cost of a salary and expenses which would be incurred by a non-owner filling the position. You will then have a better assessment of true profitability. If the business does not have an accountant or attorney to assist, this would be an appropriate time to seek advice.
Determining The Structure And Tax Implications Of The Deal
The deal may be structured in a variety of ways, including a lump-sum payment, earn-out, a seller note, consulting and employment services, with a non-competition agreement. Working with experienced, practical attorneys can help ease the risk and enable a structure that works for the seller.
The tax implications to the seller will also vary based upon the tax structure of the company. Whether the sale price will be a capital gain or ordinary income will depend on the duration of time the owner held the assets. Further, an entity taxed as a C-corporation will address the tax implications at the corporate level while an entity treated as an S-corporation, or as a disregarded entity or partnership, will address tax at the owner level.
Gain will be calculated based upon purchase price allocation and will be affected by prior tax elections and distributions. Selling your company without considering tax implications could result in a significant tax burden and diminution of the actual cash benefit to the seller.
Considering Your Business Liabilities As The Owner
Sellers must always consider business liabilities. Often, the owners must personally guaranty real estate leases, operating leases for equipment, loans, supplier agreements and other obligations. When selling the business, it is important to seek releases of each of these guaranties.
Further, there may be liabilities that arise post closing. The buyer will rely on the seller’s representations and warranties contained in the asset or stock purchase agreement. Disclosing issues in the agreement may protect a seller from future claims of the buyer. It is imperative to word the representations and warranties appropriately to avoid hidden meaning.
For those considering working with a broker, brokers can be helpful in establishing value and identifying potential purchasers. However, the seller must recognize that the broker is neutral and ultimately motivated by closing the sale.
Consult With An Experienced Lawyer
Although engaging counsel may cost money, the practical and actual experience of counsel can help a seller protect themselves from later claims, assist in appropriately structuring the transaction and effectively guide the seller through the process.