How to Structure the Sale of Your Business
Prior to selling your business, you need to determine what is most important to you as a seller. Is it strictly price, or is it also the terms of the deal? Terms drive deals, and by negotiating the terms carefully, you can walk away with a deal that is comfortable as well as profitable.
By evaluating why you are selling, you can structure the sale of your business to meet your needs. For example, if you need immediate cash, you will want to structure your sale differently than if you wish to work part-time or stay on with the company after the sale.
How you structure the deal will be based on several factors including:
- The legal structure of the business. Is it a C Corporation? An S Corporation? A sole proprietorship? An LLC?
- What you are selling. Is real estate included? Are there assets that are not being sold? Are there assets or facilities in another location?
- The type of sale. Is it an asset sale? Are you selling stock? Are you selling part of the business or the entire business?
- Your tax situation. What will it be in the future? You want to structure a deal in such a way as to avoid a major tax bite.
- Seller financing. Will you be offering to help finance the sale? If so, what percentage will you finance? What rate of interest are you charging?
- The amount of the down payment. How much are you asking for as a down payment, and how much can be paid over time?
- Your plans after the sale. Are you planning to stay on after the sale to help run the business, or will you be available as a consultant?
All of these factors, along with your immediate needs, will be part of the equation. In many cases, unless you own a C corporation, you will likely want to structure the deal as an asset sale. If there are assets that will not be included in the transaction, the contract must spell that out. In the case of a C corporation, you may structure the sale as a stock sale to avoid double taxation (corporate and shareholder taxes). However, if you structure the sale carefully, you may be able to conduct an asset sale without incurring too much extra tax liability.
If you own a company where stock has been issued, you can make a stock sale. This will take greater due diligence, and your buyers may be more cautious.
When structuring the sale, sit down with your advisors and consider all the factors that will affect the sale: the type of business, the amount of debt, your gross revenue, and your needs as a seller.
Keep in mind that when structuring a sale, you must be prepared to negotiate. It is rare that a deal will play out exactly as you have structured it. Therefore, you will need to know where you can be flexible and where you cannot make adjustments.
Be especially wary of changes that will result in you paying higher taxes. Remember that as you restructure a deal in favor of the buyer on one end, it affects you, as the seller, on the other end. Therefore, you will need to constantly strike a new balance whenever you restructure the deal during negotiations.
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