What to Know When Selling a Business
As a business owner, you are well aware that walking away from a business isn’t as simple as quitting a job when you’re ready to move onto other things. It may have even been simple to file those incorporation papers and get things going, but if you’ve been thinking about selling your business then you need to take several steps and considerations before doing so.
First, are you going to sell the entire business or just components/the business assets?
If you’re going to sell the entire business where it remains operational, opposed to just shutting down, you need to find a willing buyer and set a price both parties agree to. You will need an accountant and attorney to facilitate what is going to be a very large and cumbersome transaction.
If you’re selling the entire business or just a division, the buyer could be another small business owner who would rather buy your pre-existing business that already has customers and an established name than use their capital to take the risk on a whole new venture. If you were very successful, a major franchise or brand could also be interested.
If you want to simply shut down the business and just sell off its assets like remaining inventory, furniture and fixtures, copyrights and so on, you can be faced with one or several buyers. You may or may not need an attorney’s assistance but you will definitely need an accountant to assist you through the tax aspects of these transactions. Shutting down your business and selling off its assets will produce wildly different results tax-wise than selling the business in whole or part. The entity you chose will also affect the outcome: qualified small corporations have some tax relief for selling your equity, while an unincorporated business may not be as favorable when you sell.
Why are you contemplating selling your business?
If your year-over-year profits have met or exceeded industry norms relative to the location of your business and volume, you won’t have as much trouble finding a buyer. Getting ready to retire or move onto other things you’d like to do with your life are valid reasons for selling, but if you want to sell because the business isn’t very profitable you’re going to have difficulty getting a buyer. In that case, it makes more sense to divest and sell your business assets instead.
How much is your business worth?
You will need to hire an external business valuation professional who can produce an unbiased appraisal of how much your business is worth. This appraisal will help you determine what price to set and justify it to potential buyers. It also communicates that you are serious about selling and are taking the necessary steps to ensure a smooth transaction.
When do you plan on selling?
Selling your business isn’t as simple as quitting a job. You need to plan this at least 1-2 years in advance. This gives you time to prepare with your attorney and accountant, but also get your business and personal finances in order to become more appealing to a potential buyer since it can take months or even years to get one. You may also decide in those 1-2 years not to sell after all if you’re either having trouble getting a buyer or circumstances change with your business or personal life.
How are you showing your business to potential buyers?
Have your accountant prepare up-to-date financials for the last three years. Make sure potential buyers sign confidentiality agreements so your trade secrets won’t be leaked if they decide not to buy. For buyers who need financing, you may also want to pre-qualify them before showing them around and handing over those financials so you know you aren’t wasting your time.
Rue & Associates is here for every step of your entrepreneurial journey from making that first business idea go into action, to preparing your exit strategy or succession plans. All of these steps have tax implications and you need expert advice on your side. Contact us today to speak to one of our friendly and professional tax law and small business experts.