Selling A Business

When preparing your business for sale, preparation and planning are the key. A well documented business sells! The following is a list of information you will need to compile to present to potential buyers:

  • 2-3 years to date of Financial Statements that include -
    • Profit & Loss Statement
    • Balance Sheets
    • Depreciation Schedule
    • Staff details & wages
    • Owners wages and expense
    • Owners personal tax returns
  • Year to date sales figures
  • Current rent and outgoing expenses
  • Details on managing personnel
  • Hours owner works in business
  • Plant & Equipment Schedule
  • Estimate of Stock
  • Copy of current lease
  • Hours of operations
  • Licenses required
  • Ongoing advertising

This information will be crucial for a buyer if they intend to use a financial institution for lending purposes.

How to Determine Selling Price

When selling your business there are various factors to consider when trying to determine an asking price. Put yourself in the buyer's shoes, and think about what you would be looking for. The following is a list of indications on how to help place a high or low value on a business:

High Value

  • High sustainable cash flow
  • Room for growth
  • Anticipated industry growth
  • Location, area, etc.
  • Business niche
  • History and reputation of business
  • Low failure rate in industry
  • Modern, well maintained facility

Low Value

  • Concentration on a few major customers/clients
  • Company's reliance on owner
  • Poor financials
  • Distressed circumstances
  • Few assets
  • Product or service sensitivity
  • Poor outlook for industry: regulations, price cutting, foreign competition, discount stores, etc.

Valuation Methods Include:

  • Market-based - Asking price is determined based on sale prices or demand of similar businesses in your area or industry, and the goodwill factor. This is a common method used by Business Brokers.
  • Asset-based - Book value and liquidation value of the business. Not generally used as the sole path to an asking price.
  • Earnings-based - Historical financial figures are used, including debt payments, cash flow, and revenues. This is often combined with asset-based valuations for a more inclusive appraisal.

Employing the services of a professional business appraiser, such as a Business Broker, CPA, or Attorney, may lend more credibility to your asking price and allow you to keep the reins on sale price negotiations.

Tax Concerns

When you start thinking about selling your business, also start thinking about how to structure the sale so that you minimize the tax liability on the gain from the sale. For example, if you provide financing to the buyer by accepting installment payments or stock shares, consider structuring the transaction so that you don't pay tax on the gain until you receive all of the installment payments or shares of stock. Other possibilities would be:

  • Sole Proprietorships or partnerships - You may want to change your structure and incorporate. This holds the corporation responsible for tax liabilities and debts, not the individual owners.
  • Or you may want to consider an "S" corporation, because it is not a Taxpaying entity, which means there is no second layer of taxation when assets are sold. However the IRS has imposed restrictions to ensure that companies don't use this structure to avoid taxes. To qualify for an "S" status, a corporation can have only one class of stock, no more than 35 stockholders, and cannot own 80 % or more of a subsidiary.

It would be advisable to consult your tax advisor or accountant to determine the best way to structure your business for sale.