It is always a difficult decision to sell a business. However, owners have numerous reasons why they might sell their business, such as family issues that cannot be resolved, difficult industry or operating situations, no successors in line to run the business, or market conditions that are optimal for a sale.
Whether you have already made the decision to sell the business, or you’re still considering it as a possibility, owners and management need to review and consider several factors.
- Status of Key Management and Employees – Frequently in family-owned and privately-held businesses, owners and management have spent significant time working side-by-side with many of the company’s employees and have developed long-term relationships. It is often important to owners to make sure employees are treated fairly once the deal is consummated. For some owners, this is one of their top considerations and can play a key role in the determining whether and to whom they will sell the business.
- Asset Sale vs. Stock Sale – This can have a significant impact on the shareholders of the company and the amount of tax they will pay. Asset sales are more common; prospective buyers receive more favorable tax treatment and can avoid inheriting certain legacy issues or assuming unknown liabilities. On the other hand, shareholders can receive capital gains treatment when selling their stock instead of assets, which usually results in a lower overall tax rate.
- Taxes – There can be a significant cash outflow in the sale of any business. Tax rates vary by entity type (pass through entities or C Corporations), thus resulting in different tax consequences. A determination of the purchase price allocation will need to be completed by both parties and attached to each party’s tax return. In the case of a pass-through entity, the allocation of the purchase price may have a significant impact on the amount of taxes owners will pay as certain gains may be treated as ordinary income or capital gains.
- Cash Flow – Owners and management should model scenarios in order to determine the approximate net cash flows to be distributed to shareholders. Factors to consider include taxes to be paid on gains, professional fees, broker fees, severance pay to key employees who are not retained by the buyer, stay bonuses to individuals who will continue to work with the sellers to wrap up business, and financial affairs after the sale.
- Legacy – This is a significant consideration for the founders or family members who have seen their business pass down through multiple generations. They have spent many years building the business, and they do not want to see everything change after a new owner buys it. The owners’ business standing and reputation in the community are also important. They are often involved in community events, donate time and money to charities, and are leaders in their respective communities. In some instances, sellers may be able to negotiate some continuance of the community involvement by the business.
These are only some of the important issues facing owners who are considering a sale of their business, which is often one of the most important decisions an owner can make. However, taking the time to carefully consider these factors can increase the odds of a transaction that meets all of the owner’s objectives.
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