Buying or selling a business may be one of the biggest career and personal decisions you'll ever make. Making the right decision can bring personal and financial rewards you could not have realized otherwise. Making the wrong decision can do just the opposite.
The key to making the right decision is taking every step carefully-weighing everything from the value of the business to financing the sale.
Step 1 - Evaluate the business's worth. Obviously, a business valuation is critical for setting the right price for the business, but it's also critical for securing financing.
The valuation method used will depend on the type of business. It can be based on past or current earnings, return on assets, cash flow, the balance sheet, value of assets and other factors.
Accountants and valuation firms experienced in evaluating businesses in the subject industry or profession can help determine the correct standard and method for the valuation as well as help guide buyers and sellers through the valuation and sale process.
Step 2 - Negotiate the purchase structure. If the business is a corporation, the buyer and seller will need to decide whether to transfer assets or stock.
Sellers will tend to want a stock sale for tax purposes. The sale of stock is the sale of a capital asset, so the seller pays income taxes on any long-term gain at the current maximum capital gains rate of 15 percent.
Buyers, on the other hand, most likely will prefer to buy assets. When buyers purchase the stock of a business, they are also purchasing any potential problems the business has, such as liability claims by customers, employment law violations and back taxes. Buying stock means buying a lot of potential risks.
When buyers purchase assets, they can depreciate the assets-regardless of whether the assets had already been fully or partially depreciated by the former owner-and enjoy the resulting tax benefits.
Once the buyer and seller agree to an asset- or stock-based transaction, they'll need to weigh several other factors, such as whether to purchase all assets at once. If the seller is selling business assets and a building, for example, the parties may want to enter into a long-term lease agreement for the building with an option to purchase at a later time. A lot will depend on how much cash the buyer has available and the resulting tax impact to both parties.
It may also depend on the wishes of the seller. Many prefer to lease their buildings and enjoy steady income streams from rental (income that is not earned income and therefore not subject to Social Security tax).
Step 3 - Conduct due diligence. Buyers need to review as much information as possible about the business to be sure they know exactly what they are purchasing - the good and the bad. To that end, buyers should obtain from the seller:
copies of five years worth of tax returns and financial records;
environmental assessments of any real property involved;
employee records to determine which employees they may need or want to retain or rehire;
equipment and inventory lists; and
customer lists and purchases per customer to assess any concentration of business in just a few customers, the likelihood of retaining customers after purchase, etc.
During this phase, buyers should also consider what kind of relationship they want to maintain with sellers after the sale. In some cases, the buyer may want the seller to remain as a consultant for a period of time.
Buyers may also need to consider having sellers sign non-compete agreements to prevent them from starting another like business or working for a competitor. Sometimes buyers want to make payments to the seller over time for this very reason. As long as the buyer still owes money to the seller, the seller has a vested interest in the business performing well and is less likely to disparage the company or lure customers away.
Step 4 - Secure financing. The whole process of evaluation, negotiation and due diligence should be worked on in conjunction with securing financing. All of these steps will help the buyer determine how much to pay and under what terms.
Usually for the buyer, the more you can pay over time the better. If buyers need additional cash up front, they can benefit by working with an experienced business banker who's aware of all the financing possibilities available, such as Small Business Administration and Wisconsin Development loans. A seller may prefer payments over time as well to spread out the tax impact.
Missing any one of these steps could lead to regrettable decisions. Buyers and sellers both need good teams to watch out for their best interests. From valuation experts to accountants and attorneys experienced in buying and selling businesses, trusted advisors can help you throughout the process and ensure any desired or needed contingencies are included in the final sale agreement.
For more information on buying or selling a business in Wisconsin, contact us at 608-784-5678.