09 Sep 2021 Selling Your Business
Authored by Haynie & Company Partner Bernard Abercrombie, CPA
You have worked hard for years building a tremendous business and have determined that selling the business is the next step. Each year clients ask our thoughts on selling their business. I will cover some of the basics here.
Preparing for the Sale
First and foremost, you need to prepare the business for sale. This can be a multi-year project. Starting the preparation process should start well in advance of a potential sale. This article is too short to cover all the Due Diligence issues that a potential buyer will want to address. These include making sure the facility is neat and organized, ongoing infrastructure is in place, accounting records are in good shape, tax returns are readily available, and detailed projections of future income have been prepared. Getting ready can be relatively simple, but most often is a monumental task.
Asset Sale vs. Stock Sale
So, let’s assume you are past all that. You are ready to sell and have potential buyers interested.
Most sales of small to medium-sized businesses will be sold as an asset sale instead of a stock sale. This does not include publicly traded companies, mega family corporate businesses, and sales to family members and/or employees. A seller would almost always prefer a “stock” sale. This means the entity the business is in, is what is being sold. For instance, if the entity is in a corporation, the corporation’s stock is what is being sold. In this case, everything inside the corporation goes with the sale, and shares of the corporation are transferred to the new owners.
In practicality, unless the business has some proprietary license or asset that is so embedded in the corporation that it can’t be transferred to a new owner outside of the corporation, a stock sale rarely happens. There are many reasons why a buyer would not want a stock sale, the most common being to protect the buyer from unknown liabilities. The seller would like a stock sale as 100% of the proceeds would be eligible for capital gains tax treatment, but as indicated, this rarely is agreeable to the buyer.
The normal procedure is an asset sale, where the owner of the business retains the entity that the business is in, but the assets inside the entity are sold to the buyer. In this scenario, all the furniture, fixtures, equipment, Goodwill, client lists, etc. are sold to the buyer and the entity receives the sales proceeds. In flow-through entities such as Partnerships and S Corporations, this can sometimes have a relatively inconsequential additional tax impact. If the sale is from a C Corporation, the sale is likely subject to double taxation, first on the gain on the sale of assets and then a taxable distribution out of the corporation to the owners.
Your Vital Team
There are innumerable other issues such as escrow amounts, pre-sale transfers, earn-outs, working capital requirements, indemnity agreements, equity rollover requirements, employment contracts, non-compete agreements, and so on that need to be fully vetted before a contract is agreed upon. Working with your legal, tax, and accounting team is vitally important. Haynie & Company is here to help. Contact us with any business questions. It’s never too early to start planning and asking questions.
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