Chapter Six

Will it be an “ASSET” sale or a “STOCK” sale? The first (and most fundamental) question when structuring either an internal or external transition of any business, is whether it will be structured as an “asset” sale or a “stock” sale. Since most companies are either corporations, or LLCs taxed as a corporation, this discussion will refer to corporations. If your business is a sole proprietorship or partnership, your situation will be similar to an “S” corporation.

Most sales are structured as an “asset” sale. In some cases a “stock” sale is more appropriate, although the parties to the sale may not realize this. There are major legal and tax issues involved, and they impact the buyer and the seller differently. The difference can be profound, with major operational, legal and tax ramifications.

This fundamental decision can become a highly contentious difference between what the buyer and the seller want in the sale!

Buyers: Although it will not always be the case, buyers will usually prefer an “asset” sale structure.

An “asset” sale exposes the buyer to less potential carry-over legal liability than a stock sale, so the starting point recommendation from most attorneys representing the buyer will be an asset sale. The tax effects in an “asset” sale also tend to favor the buyer compared to a stock sale, so most CPA’s for the buyer will also favor an asset sale. Accounting rules for publicly traded corporations favor “asset” sales, so big national buyers favor asset sales.

Although the starting point for most attorneys will be to favor an “asset” sale, the legal issues are complex and varied. There is much more involved than just potential carry-over liability, and other issues can sometimes favor a stock sale instead of an asset sale. For instance, favorable contracts of all kinds with third parties are often much easier to preserve in a stock sale. Legal issues are covered in more detail in other chapters.

Sellers: The decision is not as clear-cut on the seller’s side of the table. In some cases, taxes on the seller will be essentially the same regardless of whether a sale is structured as an “asset” sale or a “stock” sale. In these cases, the seller is usually neutral between an “asset” and a “stock” sale.

In some cases, the seller will be taxed much more heavily in an “asset” sale. In these cases sellers will strongly prefer a “stock” sale. The extra tax can be so high that it will actually kill the deal unless either the sale is structured as a “stock” sale, or some other way can be found to reduce the tax.

There are various ways to mitigate the tax damage; all of which add complexity, and none of which completely eliminate the problem. The simplest solution is to mutually agree to a “stock” sale. The disadvantages to the buyer can be offset by a reduced price.

An overview of the tax issues is provided at the end of this chapter. Ways to potentially mitigate the damage are covered in other chapters.

Basic Steps in an Asset Sale:
In an “asset” sale, the assets of the corporation are sold directly by the corporation – not by its shareholders personally. Let’s assume for purposes of illustration that the primary asset sold is the company’s customer accounts or book of business (an “intangible” asset) in a heavily intellectual property based business. The stock of the corporation is not sold – that would be a “stock” sale.

The basic steps in a typical “asset” sale by an incorporated business are as follows:
(1) The buyer is often an existing company that is already incorporated. That corporation is the “buyer”; not the shareholder(s) of that corporation. If seller financing is involved, the shareholder(s) of the buying corporation will generally be required to guarantee payment of the purchase.
(1.a.) NOTE: If the buyer is an individual who intends to operate the business as a corporation, that buyer should form the buying corporation PRIOR to the acquisition.

(2) The buying corporation pays the selling corporation for those assets. The money and/or seller-financed promissory Note goes to the corporation, not directly to the selling corporation’s shareholders.
(2.a.) The buying corporation may need to renegotiate various legal agreements, such as leases, contracts with key vendors or customers, etc. These negotiations are often started prior to closing of the sale, particularly if a favorable lease or critical vendor or customer contracts are involved.
(2.b.) The buying corporation becomes the NEW employer of the selling corporation’s employees. New employment contracts should have been presented to the employees prior to closing, with enough time for their attorneys to review the drafts prior to signing. In order to make non-piracy covenants in those new contracts enforceable, the employee should not do any work for their new employer until they have signed their new terms of employment.

(3) Next, the selling corporation pays whatever liabilities it owed at the time of the sale, plus any taxes owed on the sale of its assets. The corporate taxes are owed in the year of sale.
(3.a.) An often overlooked seller obligation is accrued employee vacation, even if the seller keeps its books on a cash basis.
(3.b.) An “S” corporation might not owe much tax; although this is not always the case. Always check with your CPA on this.
(3.c.) If the seller is a “C” corporation, the federal tax at the corporate level is likely to be 34% or more, plus whatever tax your state imposes. Much, but not all, of this draconian extra tax can be mitigated by pre-planning or a more sophisticated structure for the sale.

(4) After taxes and whatever other liabilities the selling corporation may owe are satisfied, that corporation then “liquidates” itself and distributes the remaining after-tax cash and/or promissory Note that it received from the buyer to the selling corporation’s shareholders.
(4.a.) Any remaining assets owned by that corporation that were not included in the sale are also distributed to its shareholders at this time. For instance, the seller’s company car is often in this category.

(5) The shareholders then pay personal capital gains tax on what they received. If significant taxes were owed at the corporate level first (such as with “C” corporations), then this is essentially a second tax on the same sale!
(5.a.) Counting state and federal taxes at both the corporate and personal levels, the combined tax on the seller can easily be over 60% of the total sale price. 

Taxes this high can obviously be disastrous to a seller. Worse, the impending tax hit may not be known by the parties until the seller's C.P.A. is brought in just before closing. All parties (particularly the seller) are dismayed by the taxes about to be owed, but it can be difficult to restructure a sale at that late date. But if the tax problem cannot be solved, it can rightfully become a “deal killer”.

Disasters like this can be avoided by advance planning by the seller prior to the sale, and by a more sophisticated sale structure at the time of sale. For instance, if the selling “C” corporation had switched to “S” status 10 years earlier, then most of the problem would have gone away. Likewise, it is often possible to greatly reduce the double tax problem with a more sophisticated sale structure at the time of sale. This is discussed in a later chapter.

When is an Asset Sale “OK” from a Tax Standpoint?
From a tax standpoint, an asset sale is most appropriate when the draconian tax at the corporate level can be avoided. This is most likely when the selling company is either not incorporated at all, or is an “S” corporation that was never a “C” corporation in the first place. In each of these cases, the corporate level income tax on the sale of the book of business can be avoided. There may still be other taxes, but this avoids what is usually the worst tax hit at the
corporate level.

If the selling company is an “S” corporation that used to be a “C” corporation, then the date of the conversion is crucial. A “C” corporation that converts to an “S” corporation must wait 10 years before most of the tax at the corporate level goes away. However, if 10 years have not gone by since the switch, an “S” corporation may have just as big a problem as it would have had if it were still a “C” corporation. For “S” corporations in this situation, the corporate level income tax will be on what the IRS refers to as “built-in gains”.

All shareholders are taxed in an asset sale, even if they are not selling their own shares. Hence, if one shareholder is selling but the business as a whole is not being sold, then an “asset” sale is rarely appropriate. Shareholders not involved in the sale would not appreciate having to pay taxes just because someone else sold. This situation is almost always a “stock” sale of that shareholder’s shares.

Basic Asset Sale Tax Effects on the Buyer
Assume the primary “asset” being sold by a company is its customer accounts. The price paid for this asset will be amortized (i.e., deducted for tax purposes) by the buyer over a 15-year period regardless of the length of time over which payments for it will be made. Obviously, a tax deduction spread out over 15 years is not worth as much as a deduction that the buyer gets to take right away; but it is still worth having.

If the buyer subsequently re-sells that book of business, the amortization that was taken each year will have to be “recaptured”. In most cases, this means the deductions taken each year must be reversed and treated as income in the year of sale. This “phantom income” in the year of the subsequent sale generates tax at the corporate level that must all be paid in the year of that sale! This is a major future tax that the buyer should consider and plan for at the time those customer accounts are originally purchased.

Amortization of intangibles (such as a company’s book of business) is covered by Section 197 of the tax code. In 2005, the rules were changed on how this amortization is “recaptured”. The intent was to collect more money (naturally). Under the new rules, it is very difficult to avoid “recapture” of the entire amount previously amortized when a purchased book of business is resold. Obviously, this has the potential to be a major unexpected tax hit in an
“asset” sale even for an “S” corporation.

There appear to be ways to avoid full amortization recapture. They are more likely to work if they are planned for at the time the accounts are purchased rather than after the fact when they are re-sold. These methods appear to be entirely consistent with tax law, but are a “facts and circumstances” issue that cannot be guaranteed. To your authors’ knowledge, they have not been tested in court.

Basic Asset Sale Tax Effects on the Seller
If the selling corporation is NOT a “C” corporation or an “S” corporation subject to the draconian corporate tax described above, then in most states the corporation itself will not owe income tax on the sale of its assets.

The selling corporation's shareholders will still owe capital gains tax at the personal level. Capital gains tax will be about 20% at the federal level, plus whatever state and local taxes your state imposes. For many sales, an additional Obamacare Net Investment Income Tax of 3.8% will also be included.

If the seller is a "C" corporation, then sellers will be taxed first at the corporate level, and then what’s left will be taxed at the personal level.

The selling corporation will owe corporate income tax on almost the entire amount received. State tax rates vary by state, but the federal tax will be about 34% depending upon the size of the sale. Next, the individual stockholders will then owe capital gains tax on what’s left at the personal level. The state tax will vary, but the federal tax will be about 20% plus a potential Obamacare Net Investment Tax of an additional 3.8%. The combined federal tax will be about 50%. When state and local taxes are added in, the total tax on the seller can easily exceed 60% of the total sale proceeds.

Many sellers would rather not sell at all than pay taxes this high. If the seller has this tax predicament, several basic tools are available to at least partially remedy the situation. They will be explained further in subsequent chapters.

CHAPTER 2
THE VARIOUS TYPES OF BUSINESS SALE SITUATIONS

 





Authors:  Gary E. Jacobson, J.D. and Larry Morrison, MBA, CBA, CMA

The first article was about getting ready, and included a general overview of a business sale from a seller’s perspective.  This should help both buyers and sellers start thinking about the key issues in a business sale right away, but a business sale is not a “one size fits” all situation.  The details that apply in a specific situation will not all be the same.  Before proceeding further, it’s important to step back a bit and look at the big picture for business sales in a variety of circumstances.  Not all business sales are for the same reasons, and the circumstances of the sale can have a big impact on how a sale should proceed. 

What KIND of Buyer is it?
Before considering the various sale situations, it helps to consider the KIND of buyer.  In almost all cases the buyer will be either another company or an individual. 

If the buyer is another company then it is likely the buyer will be able to run the business successfully.  The buyer’s ability to pay may be fairly secure.  Training the buyer may not be critical, but assistance with customer retention after the sale may be critical.  The buyer may be more sophisticated, or at least have more sophisticated advisors.  Consideration for the sale may include some form of performance based incentives (i.e., an “earn-out”).

If the buyer is an individual, training the buyer may be even more important than assisting with customer retention.  Since the buyer’s ability to run the business successfully may not be as certain as it would be if the buyer were another company with a proven track record, the cash and/or collateral the buyer brings to the table may be a major factor in the sale.

The Most Common Sales Situations
These are the most common sales situations.  Whether you are a buyer or a seller, one of these situations most likely fits you.  Additional details applicable to each are covered later in subsequent articles.

Very Small Business - This is the most common business sale situation

• Sometimes referred to as “Mom & Pops”, “Main Street Businesses”, etc.
• Most of these businesses do not actually sell.
• This is usually a sale to an outside individual (an “External Sale”).
• Sometimes (although rarely) the sale will be to an insider (an “Internal Sale”).
• It is rare to have an employee with both the interest and the ability.
• The person needed can sometimes be recruited.
• Can often be creatively structured as a win/win, even if the buyer has little money.

Somewhat Larger Small Business - External Sale

• More likely to sell than a Mom & Pop, but many never do.
• Internal Sale
• Easier to structure than for a Mom & Pop, but still difficult to find the right successor.
• Family Sale
• The IRS has insanely complex rules designed to make sure they get all the tax revenue they think they are entitled to.  Which is A LOT.
• Will most likely need an appraisal to support the price.

Divorce

• Often VERY contentious, with expensive appraisal and attorney fees, and the eventual price and terms set by a judge.
• Can sometimes be greatly simplified with advance legal planning (such as Shareholders Agreements).

Partner Buyout

• Can also be contentious.
• Can sometimes be greatly simplified with advance legal planning (such as Shareholders Agreements).

Sale for Health Reasons

• If the seller is in ill health but not clearly dying
• Time is not as critical as for a dead or dying seller.
• Potential buyers may try to take advantage of the situation.
• The seller’s help with the post-sale transition may be affected.
• If the seller is still alive but clearly dying
• A sale planned to occur upon death can sometimes be arranged.
• This has the potential to save a LOT of tax.

Seller (business owners) has passed away

• The company may be in turmoil.
• Can be VERY difficult to find a buyer.
• Tax issues can be VERY complex.

Financially Distressed Sale

• If the business is in trouble, the buyer will need to see a way to fix the problem, or a sale will not happen.
• Often involves simply liquidating the assets and walking away.
• May be forced by the company’s lenders.

Sale to a Large Buyer

• Likely to be fairly sophisticated buyers.
• Likely to include an “earn-out” as part of the “price”.
• Publicly traded buyers 
• May involve tax-advantaged strategies involving the buyer’s stock.
• Large, closely held buyers
• May be easier to attract than a publicly held buyer.

Start-ups

• Often done with personal funds.
• If funding is from family and friends, then their ownership must be decided.
• If Venture Capital is involved, then complexity goes way up.
• Usually only available if the upside potential is very high.
• Initial Public Offerings (“IPO’s”)
• Basically, this is selling part of the company to the public in the form of company stock.
• Often involves venture capital at an earlier stage.
• VERY complex.

Employee Stock Option Plan (ESOP)

• Very complex and expensive.
• Can have significant tax advantages.
• Might have motivational effect on employees.
• Not as popular as initially expected when these were created.

Very Small Businesses
These businesses are sometimes referred to as “Mom & Pops”, “Main Street Businesses”, etc.  Although each company is small with only a few employees, they represent a huge part of the goods and services available in our economy, and are the embodiment of the American Dream for many people.

Attempted sale of these businesses is the most common business sale situation.  Unfortunately, most of the time they never actually sell.  Some estimates are that only one in seven of these businesses will actually sell once they are listed for sale.  Many more simply shut down once the owner decides to move on to something else.

Unrealistic expectations on the part of the seller, particularly the value of the company, are one of the reasons blocking sale of many of these companies.

The value of these companies is NOT the value of the company to the seller, which may be quite high.  Instead, the maximum value is limited by the cost a potential buyer would incur to start a similar business instead.  That means the value may be determined by the value of the equipment, plus something extra for the “running start” available to the buyer from buying the existing business instead of starting a similar operation from scratch.

Formal valuation approaches based on the net present value of expected future cash flow, net of reasonable compensation to the owner, often do not apply.  Instead, rules of thumb based on some multiple of sales plus the value of the equipment acquired are often used.  These rules of thumb have even been published in a book, the Business Reference Guide, The Essential Guide to Pricing Businesses and Franchises, compiled annually by Tom West and available through Business Brokerage Press and available on the web at www.bbpinc.com.  (One of the authors of the article you are reading right now is one of the contributors to this book.)

It is important to remember that these rules of thumb are GENERAL rules, and may not be valid for a specific situation.  It is also important to remember that these rules of thumb were developed based on businesses that actually sold.  That means they are biased in favor of the most attractive businesses offered for sale.  The businesses that never sell have very little impact on these rules of thumb.

Ultimately, the value of these businesses is determined just like the value of any other business:  What a willing buyer and willing seller agree on.  Both sides must see it as in their best interest to do the deal, or it will not happen.  In other words, it must be a win/win or it will not happen.

One way to sell these businesses is to arrange an internal sale.  The key to this is finding a person(s) who has the necessary skills and entrepreneurial drive.  Entrepreneurs are often harder to find than the people with the necessary skills.  For companies that do not already have that person, it may be possible to recruit them based on the possibility of their buying the company in the future. 

Sales of this type can be arranged even for buyers who do not bring much of their own money to the table.  Finding advisors who can assist with this can be challenging as well.

Somewhat Larger Small Businesses
Once a business has grown past the “Mom & Pop” size, it may be a bit easier to sell.  There is no generally agreed minimum size for this, but these businesses often have ten or more employees.

Many of these businesses are only marginally profitable, and will be priced using similar methods to their smaller cousins.  Those that are profitable enough will be priced based on the adjusted profits a buyer can reasonably expect in the future.  The key to their sale will be the ability of the buyer to continue operating the business profitably in the future, which often means the seller will need to help with the transition.

Much of the literature on buying and selling a closely held business is focused on businesses this large or larger, and assumes the buyer will be either an outside individual, or another business.  Little attention is paid to the possibility of an inside sale.

These businesses are easier to arrange internal sales for than their smaller cousins, although it is still rare to see this done.  Finding entrepreneurs is always hard, and few advisors understand the issues enough to help.

Divorce
A divorce often means half the business must, in effect, be sold to the spouse who runs it.  If both spouses worked in the business prior to the divorce, one of them most likely will seek employment elsewhere.

The biggest question in these sales is usually price.  Terms tend to be based on asset trade-offs, with cash paid for whatever value cannot be offset by other assets.  Bank financing is sought as necessary to provide the cash.  Appraisals are used to establish value, with a judge determining the final result if the appraisers used by each side differ in their opinion of value.

Advance legal planning, including agreement on how value will be determined, can help simplify the process dramatically.  Most owners are aware of the possible use of a pre-nuptial agreement but do not have one.  Less well known is that a proper Shareholders Agreement can simplify the divorce issues, including valuation, by quite a bit.

Shareholder/Partner Buyout
Buying out a fellow shareholder/partner may or may not be a contentious process, but it is still likely to involve disagreement over value.  EVERY multi-owner business should have a Shareholders Agreement (or equivalent) to address the multitude of issues that need to be spelled out in advance in this situation.  How value will be determined, as well as the terms for a buyout, is just one of the topics that should be covered in this agreement.

This is a huge topic with its own article later in this series.

Sale for Health Reasons
Many sales are triggered because the owner is in ill health but not clearly dying.  The seller has a very good reason to want to sell, but is not under pressure to do so immediately.  These sales are very similar to any other sale for a similar business except the seller may not be able to provide as much help during a transition.  If an internal sale is desired there may not be enough time to recruit key employees, and longer term planning may not be an option.

If the seller is facing a potentially terminal disease, the sale will be much more complex.  Seller assistance post-sale is much more problematic, thus lowering the value to a potential buyer.  Likewise, the business itself may be suffering from neglect by the owner because health matters take priority.  The seller will be at a disadvantage in negotiations as well, since potential buyers may sense the seller HAS to do the sale.

Tax planning for the seller’s heirs may play a major role for a seller facing a terminal illness.  The tax issues include potential estate taxes, plus potentially dramatic differences in how the sale itself will be taxed. 

It is possible to plan a sale in advance, with the sale itself being deferred until the seller’s death.  As a protection to the buyer, the sale generally includes a “no later than” sale date, and may include provisions for the buyer to operate the business prior to that date as well.  In the right circumstances this can reduce taxes substantially, provided the sale itself is structured properly.  The technical elements in the sale structure for this situation may be quite different than for a typical sale.

Financially Distressed Sale
Some businesses are put up for sale as a last ditch attempt to avoid bankruptcy or being forced to shut down.  In some cases the business will go through a formal bankruptcy process, with the court eventually approving a plan to reorganize the business or mandating the business be liquidated if a credible plan to return the business to profitability cannot be developed.

If an outside buyer is sought, the potential buyer will need to see a way to fix the problem causing the financial distress, or the buyer will not buy.  Sometimes this will involve buying only the profitable parts of the business, leaving the difficult parts behind.  This can also lead to unexpected legal complications on both sides of the sale, so be sure to include experienced legal counsel in the process.

If no way can be found for a buyer to solve the underlying problems, or the profitable portions of the business (if any) cannot be sold separately, then the business is unlikely to be salable as a going concern.  In that event the business will most likely be forced to simply sell off its assets, apply the proceeds to its liabilities, and then go away.  If liabilities remain and the owner is legally liable for them, the owner may have to personally make up the shortfall.

Sale to a Large Buyer
Larger buyers are likely to be another company, often in the same industry.  They generally have the ability to run the acquired business successfully, and are often more sophisticated that the typical individual buyer. 

These buyers are not typically interested in “Mom & Pop” businesses.  The “price” they are willing to pay is likely to include a portion of the consideration in the form an “earn-out” based on performance of the acquired company after the sale.  If the buyer is a publicly traded company, the sale may sometimes include use of the buyer’s stock to help improve the tax effects on the seller, and to reduce the cash required by the buyer.

Start-ups
Starting a company is often done with personal funds and does not involve sale of part of the company.  If family and friends are used to help with funding then a loan will be required, or the other investors must have some equity in the company (or both). 

If the people helping provide the funding will also have equity, then a Shareholders Agreement (or its equivalent) is strongly recommended right from the beginning.  This should include provisions covering how the entity will be run, how it will be valued, how owners will be bought out in the future, how to handle disputes, etc.  A whole article will be devoted to this topic.

For those businesses with high upside potential, venture capital may be an option.  This is a complex option with the potential for the founder to lose control of the entity if things do not go well, but it can also be the best way to provide significant funding plus provide access to the sophisticated help that will be needed if the venture succeeds well enough to eventually go public.

Employee Stock Option Plan (ESOP)
An Employee Stock Option Plan (an “ESOP”) is a way to “sell” company stock to its employees, and gain some tax advantages for the owner as well.  Since the employees also become owners in the business, an ESOP has the potential to be an employee motivator as well.

Technically, an ESOP is a “qualified” retirement plan, with all the regulatory requirements that entails, plus a host of additional regulatory requirements to go with it.  In other words, they are complicated and expensive.  You will also need to have the company appraised essentially every year, which adds substantially to the cost. 

Although initial expectations were high when ESOPs were first introduced, the complexity, costs, and restrictions on owners have proven burdensome enough that they are not a common form of ownership transition.

Conclusion
These are the most common situations buyers and sellers of a business are likely to find themselves in.  Each of them has unique elements that make them different than the others.  We will cover each of them in more detail in subsequent articles.

HOW TO BUY, SELL, MERGE OR PERPETUATE A BUSINESS
The Series

A Comprehensive Look at the Best Ways to Handle the Biggest Events in the Life of Your Company

By Larry Morrison and Gary Jacobson

 



CHAPTER 1, PART 1 - INTRODUCTION  /  GETTING READY

Overview

Every business is eventually sold or shut down... you don't get to not do this!  

But most businesses that are put up for sale NEVER SELL!

The purpose of this column is to help Business Owners plan and execute a successful internal or external succession/transition of a business, and to help buyers find and successfully buy worthwhile businesses. We will teach practical “street level” nuts and bolts about how to do this, but we do not intend to make you a legal or tax expert. You will still need your attorney and C.P.A., but you will know how to spot key issues, and you’ll know the major options available to you. This should translate into a major advantage for you when the time comes to transition your business.

Get ready first. We’ll provide more details in future articles, but here’s an overview.

Sellers

If you are not really a willing seller, with realistic price and terms expectations, then you are probably just wasting your time. Know what your business is realistically worth. Some companies are worth two times annual revenues for example, but most are not. Is your company for sale, but only if you can get X times annual gross revenues?

Know your tax situation, and what to do if you are sitting on a potential tax disaster. For instance, if your company is a “C” corporation (or has been within the last 10 years), then the wrong sale structure means some sellers might owe the IRS more than half of the total sales price for the company? Do you know if you have this problem? If so, do you know how to “fix” it?

What about payment terms? They affect both taxes and risk for both sides. The buyer can afford to pay more if the risk is less, or the tax effects are better.  Ultimately, the “Price” is not the “Price” -- terms are crucial. What counts is the after-tax cash-in-pocket you get to KEEP after you leave!

Perhaps MOST important: Be emotionally ready. This is your baby -- are you really ready to part with it?

Contractually protect what you are selling. Can some or all of your employees leave and take key accounts with them after you sell? Can you realistically sell a company that might lose large blocks of its business in that manner?  

Make it easy for successors to preserve what you are selling. Customer retention post-sale is crucial. How can you help the buyer keep what you just sold?  

Make the buying decision easy for your successors. Start by preparing a short summary of your business as follows: 


First, be able to answer three questions:
1.  WHO’s your best buyer (make a list of top prospects)?

2.  WHY would they want to buy YOUR business?

3. Why NOW?  If your business is so wonderful, why are you for sale?

• Create defensible pro-forma cash flow spreadsheets that show the true benefits of ownership you have received in the past. 
• If you receive benefits of ownership other than just profits and salary, make it easy for potential buyers to see it.  Provide explanations for all the adjustments you need to make. 
• You may sometimes see this referred to as “free cash flow”, “available cash flow”, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Regardless of the terminology used, the objective is to determine the true financial benefits of ownership.
• If you are selling more than just customer accounts, create a pro-forma balance sheet as well.
• Know how much business you do with your top accounts, and how you are going to ensure that they stay with the company after you are gone.
• Know your vendors and how they are likely to react when you retire.
• Be ready with all of these answers in advance, with most of them written down -- perhaps even prepare a presentation book.
• Put your best foot forward, but don’t misrepresent and don’t predict the future. You don’t know how the buyer will do in the future, and you don’t want to do anything that “predicts” results. Doing so can even be grounds for rescission of the transaction if things don’t work out for your successors.
• Be ready before you have the first meeting.
• Have abbreviated material ready to discuss and/or show, and be ready to provide more detailed information as soon as mutual interest is established and a confidentiality agreement has been signed.

This is probably the biggest sale of your life -- you owe it to yourself to be ready.

What about “Price”?:  “Price” deserves special attention, partly because it often quite an emotional issue.  “Price” can be much more than just money to a seller. It can even be subconsciously seen as a measure of the value of a person’s life’s work.  

One way to keep things in perspective is to keep in mind that the sale has to make financial sense to the buyer or you will not have a sale. It will have to “pencil out”.

What about payment Terms?:  Terms are crucial to how a sale will “pencil out”.  In fact, terms are often more important that price.  In addition to a major impact on annual cash flow, terms affect both risk and taxes for both sides. 

Win/Win Negotiations:  Most likely you do not HAVE to sell, at least to one specific buyer.  Likewise, the buyer most likely does not HAVE to buy your business.  That means the sale is likely to fall apart as soon as either party perceives the sale to be a “lose”.  Terms are often the key to a “win/win” result.  Creative terms can even be a “win/win/lose”.  (The “loser” is the IRS.)





Editor's note:  This is the first installment in a series of columns on buy/sell arrangements for any company, valuation and tax issues, shareholder internal buy/sell agreements, related estate planning, employment contracts and non-competes.

The authors will give you practical street-level understanding of the fundamental legal, tax and financial concepts you need to know about regarding the biggest financial events in the life of your business -- there is nothing else like it available. 

Since many business owners are buyers, and every business is eventually sold or shut down, this is a must for everyone who owns, plans to buy, or will eventually sell a business. 

You'll learn better ways to buy, sell, merge or internally perpetuate a company from a team of experts responsible for hundreds of successful business transactions.  You do not need to be a technical expert, but you need to know enough to guide your attorney and C.P.A.  This will teach you how.

In addition to the essential foundation on buy/sell arrangements for any company, this material covers related estate planning, valuation and tax issues, shareholder buy/sell agreements, employment contracts and non-competes, all as essential parts of a comprehensive package of business documentation.