Selling Your Business? Plan Ahead
Volume 4 Issue 6 -- November/December 2000
Often, selling something of value, such as a car or a house, is not a simple task. In this issue, we will focus on some of the matters you need to consider when selling another possession of value — your business.
After
making the initial decision to sell the business, one of the next decisions is
whether to use a Broker. Most
business Brokers ask for a commission of 10% and do not get paid unless they
produce a Buyer and there is a closing. You
may want to make some inquiries on your own before listing with a Broker to see
if any of your competitors are interested in buying your business.
If
you decide to retain a Broker, the Brokerage Agreement (the contract between
Seller and Broker) must be considered. As
with any contract, a Brokerage contract can be changed or amended.
Let’s say you have spoken with several local competitors who may be
interested in buying your business, but they have not responded yet.
Can those leads you generated be excluded from the Brokerage Agreement
should the competitors decide to buy? Of
course, but appropriate language must be included in the Agreement.
Most
Brokers prefer to have an exclusive contract for as long as possible.
Such a Brokerage Agreement would provide the Broker a commission if any
Buyer (even one contacted before
the Agreement was signed) decided to buy.
Aside
from exclusivity, the duration of the Brokerage Agreement is also important.
Fairness dictates that the Broker have adequate time to implement the
listing and show your business to would-be Buyers.
On the other hand, if the Broker is not providing the desired result,
after a reasonable time, you should have the right to terminate the Brokerage
Agreement.
Whether
or not a Broker is retained, if you are going to sell your business, you need to
do some planning prior to listing it for sale. Some of the "what-ifs" to consider are:
What
if the
Buyer doesn’t want all of the business assets?
For example, the Buyer already has state-of-the-art printing presses
and doesn’t want your old junk.
What
if the
Buyer wants you to remain as an employee for a fixed period of time and pay
you a large salary which might be tax deductible to the Buyer and ordinary
income to you? You must decide,
"Do I want to stay? How
long? At what price?"
Reducing
the purchase price of a business, in consideration for a salary arrangement
with the Seller, can lead to tax and legal issues which could cause problems
for the Buyer. "So, who
cares," you say, "I’m the Seller."
While it is true that if there is a tax audit the adverse
consequences will usually be visited upon the Buyer, such a controversy may
draw the Seller into the morass as a witness.
What
if the
Buyer wants you to agree to a covenant (promise) not to compete? It would be unfair to the Buyer if the Seller took the sale
proceeds and started a new competing business across the street.
So you should anticipate being asked to agree to non-compete
restrictions that favor the Buyer. If
so, for how long should you agree not to compete?
What
if the
Buyer says, "It would certainly help me if you could provide Seller
financing and let me pay you over, say, five years?"
There is nothing wrong with Seller financing but many important
factors are involved, not the least of which is, what if the Buyer
defaults?
What
if the
Buyer asks for warranties that information you have provided about the
business is correct, or that a key piece of equipment will work properly for
one year from the date of purchase?
Since
lawyers, such as myself, are good at "what ifs," this list
could go on ad nauseam. My intent
here, however, is to raise just a few of the many questions that need to be
addressed by a business Seller.
Over
the past 20 years I have assembled a Checklist for Business Purchases or
Sales which covers many of the areas you need to consider in buying or
selling a business. Just call our
offices or visit our Web site, www.tax-business.com, to obtain a free
copy. If that doesn’t answer your
questions, then call us.
Copyright 2000
Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and
tax-related services.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.