Selling Your Business: Eight Steps
Here's what to do in order to sell your business.
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Do you want to sell your business? Consider these practical steps for making the process go smoothly.
1. Determine a Realistic Price Range
If you price your business too high, you'll scare away buyers. If you price it too low, you'll lose out. To figure out a range that's realistic, you can use one of several methods -- and then maybe blend the results. For example, you can base the price on the value of the business's assets, and add in a sum for the goodwill the business has developed. Or you can see how much comparable businesses in your industry and locale have recently sold for. Or you can use an industry formula (for example, a value based on the number of units sold annually or a multiple of average earnings).
2. Understand the Tax Consequences
Taxes can take a huge bite out of the money you receive for your business. It pays to know just how big that tax bite will be -- and to try to lower it, most likely with help from a CPA or other tax expert.
Your tax bill will be influenced by two key factors: How your business is legally set up and -- in the case of a corporation or LLC -- whether you're selling the assets or the entity. Sales of all sole proprietorships and almost all partnerships are asset sales. So are the sales of many corporations and LLCs.
3. Look Good for a Sale
The getting-ready process includes not only sprucing up your premises, but getting your numbers in good shape. Consider recasting your tax-return numbers for prospective buyers. This can involve, for example, adding back to your profits discretionary expenses such as medical insurance for you and your family, travel and entertainment, business vehicles, memberships and subscriptions, and salaries and bonuses paid to family members.
In recasting your tax numbers, you're not deceiving either the IRS or prospective buyers. You're simply pointing out that the buyer may prefer not to spend money on some of these items in the future.
4. Seek Potential Buyers
If your business is well known, word that it's for sale may be enough. Or, possibly someone close to you -- an employee, a friend, or a customer -- could be a prospect. But more likely, you'll need to reach out to a bigger pool. This often includes putting ads in newspapers and trade publications, and on business-sale websites.
You may want to engage a business broker to reach more buyers, or to keep your plans from going too public too fast. Expect to pay a substantial commission.
5. Negotiate Your Deal
In working out the terms of the sale, some key issues include whether you'll sell the business entity or just its assets, what assets (like a truck) you want to keep, and how the buyer will pay you (usually, a down payment plus installments).
6. Sign a Sales Agreement
You'll need to put the deal in writing. Among other things, your agreement should list and value the assets the buyer is purchasing, list any contracts the buyer is assuming, and include protections that assure you'll get paid the full sale price. If you attempt the first draft of the sales agreement yourself, have it reviewed by a business lawyer to make sure you've covered all the bases.
7. Plan for the Closing
The closing is the meeting at which you transfer the business to the buyer. To reduce last-minute hassles, make a checklist of all the papers you and the buyer will need to bring -- everything from the documents and money associated with the transfer to your alarm codes, keys, and customer lists.
8. File Paperwork With the IRS
After the sale, you and the buyer need to jointly complete IRS Form 8594, Asset Acquisition Statement and file it with your tax returns for the year of sale.
For More Information
Nolo's book, The Complete Guide to Selling a Business, by Fred S. Steingold (Nolo), guides you through the entire selling process. It includes a CD-ROM that helps you create crucial legal documents, including the sales agreement, a confidentiality letter, promissory notes and security agreements, noncompete and consulting agreements, and closing checklists. Or if you'd prefer to hire a lawyer for help with this document-intensive process, Nolo's Lawyer Directory will provide you with detailed personal profiles of lawyers in your area -- all of whom have taken a pledge to treat their clients with respect.