Ten Things to Consider When Selling Your Business
February 04, 2022
By Dan Gibson, CPA
Throughout the year, we meet with many clients ready to take the next step in their entrepreneurial journey and sell their closely held business. If you are pondering an exit strategy, or considering that next step, here are 10 things you should consider for a successful transaction:
1. Sale Structure
During an asset sale, you’re selling tangible and intangible assets, minus the assumed debts and liabilities. With an ownership interest sale, assets and liabilities are still transferred, though the buyer is purchasing ownership in the entity that owns those assets and liabilities. Every situation is unique, so consider what is best to reach your goals.
2. Letter of Intent
The letter of intent (LOI) is a summary of the transaction’s main terms prior to the sales contract being drawn up. The LOI is the framework for the deal.
3. Net Proceeds Analysis
Providing an accurate and proper analysis of how much cash an owner will walk away with is a crucial element in determining whether to proceed with a transaction. The owner’s expectations need to reconcile with the ultimate amount of cash (or other assets) they will end up with.
4. Buyer Due Diligence
This is often an under-appreciated and overlooked element of a sale transaction. The buyer’s due diligence team will perform a deep dive in reviewing the company’s books to determine quality of earnings and potential unrecorded liabilities. This can require a significant amount of time and effort from the seller’s key executives, accounting staff, outside accounting, and legal firm.
Earn-outs are potential future payments to the seller based on the company achieving certain financial milestones post-closing. Sellers should be certain that proceeds received at closing are sufficient because the performance measures may not be met, and the earn-out payments never received.
6. State Issues
Most sellers focus on the Federal tax impact of a transaction, but it’s important to also consider state tax impacts. If the sale is an asset sale and the entity is being closed, a formal dissolution notice should be filed with the state of formation and withdrawal notices should be filed with states in which the entity is registered as a foreign entity. Be sure to conform with state regulations for filing obligations and withholding taxes.
7. Building Operational Structure
Most buyers want to get a good sense that there are steady hands, processes, and existing infrastructure in place to run the business. The buyer will often want to make sure that there is updated software programs and adequate personnel in place to insure properly functioning accounting and human resources departments. For example, is the company able to perform timely monthly, quarterly and yearly closings of their books? If not, this may be an indication that there are structural weaknesses within the company’s accounting department.
8. Proof of S Election Status
For S Corporations, buyers will want to review the signed S-Election Form (Form 2553) that was submitted to the IRS and the approval of the S-Election received from the IRS.
9. Tax Saving Strategies
There are several strategies that can be employed that will defer, minimize, or even eliminate the gain upon sale. It’s important to plan ahead, as these strategies are best done in advance of the sale.
10. Qualified Advisors
There are many steps that go into the successful sale of a private business. That’s why we recommend all business owners retain and consult with experienced transaction advisors (attorneys, accountants, investment advisors) before entering any negotiations for the sale of your business.