The sale of a business can be a challenging and complex transaction, but the seller can take steps to make the process more efficient while maximizing his profits. Even before a buyer has been identified, the seller can begin to consider the following:
Determine what your business is worth. Many owners are uncertain about how to value their businesses, but it is important to be realistic when determining a purchase price. There are a variety of methods for valuing a business; one of the most common formulations uses a multiple of the seller’s discretionary earnings. This is a market based valuation that generates data to compare against similar businesses to calculate an appropriate multiple. This methodology is ideal for small businesses because it provides the buyer with an estimate of what he can extract from the business based on past generated earnings.
Hire professionals. The sale of a business is a multi-faceted transaction that may require expert knowledge in a range of fields. Accountants should be consulted to ensure that financial statements are current and accurate. Lawyers should review existing contracts to assess the seller’s outstanding obligations and to prepare records and contracts for the buyer’s due diligence inspection. Sellers may also consult an attorney or accountant for guidance in obtaining the most favorable tax treatment from the sale.
Understand the structure of the sale and tax liabilities. The sale of a business can be structured as either an asset sale or a stock sale. Most small business are sold as asset sales. The structure of the sale determines whether existing contracts can be assigned and establishes the amount of federal taxes that both the buyer and seller will owe after the transaction. The seller can minimize his tax liability by obtaining capital gains treatment so that the profit from the sale is taxed as capital gains rather than ordinary income, thereby yielding a more advantageous rate for the seller.
Consider a range of financing options. Sellers should consider various financing arrangements from purchasers who cannot obtain traditional bank loans. The willingness to negotiate with prospective purchasers who may require third-party financing or alternative payment plan structures can expand the potential pool of purchasers.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.