FAQ: Considerations When Selling Your Business

Selling your business is one of the most important financial decisions you will make as a business owner and there are a multitude of questions that arise with that consideration. Our corporate and business attorneys are often asked the questions outlined below and they should prepare you with things to begin thinking about for the sale. Please note that every situation is different and we cannot provide you with any uniform advice that will work in all situations. There will not always be a “win-win” situation for you and a buyer. What is beneficial for a seller many times is not beneficial for a buyer.

Should I sell stock or assets?
Generally, a seller prefers to sell stock for tax and liability reasons. In a stock acquisition, a buyer acquires all of seller’s assets, rights, and liabilities (known and unknown). A seller will not be responsible for any liabilities after the sale, unless a stock purchase agreement specifically addresses that. In a stock deal, an individual owner will be a seller as opposed to the company being a seller in an asset deal. In a stock deal, a seller gets a capital gain treatment with the taxable gain being the difference between the purchase price and seller’s basis in the stock. If a seller-entity is a C-corporation, a double taxation is avoided by the sale of stock. Buyer’s interests are quite opposite in a stock deal. Unless a seller-entity has special goodwill, such as name and specific relations with clients, buyers generally prefer to purchase assets to avoid assuming seller’s liabilities. Also, buyers can deduct the purchase price paid for the assets to offset income realized. The purchase price paid for stock is not deductible by a buyer on their taxes. The buyer will be limited to deducting depreciation and amortization based on the adjusted tax basis in the corporation’s assets immediately prior to the sale. You should also note that if you sell a partnership interest or membership interest in a limited liability company, the sale will be taxed based on the underlying assets.

How should the purchase price be paid?
Sellers should prefer cash at the closing. In some transactions, buyers may ask the purchase price to be paid over a period of time. In this case, a seller may agree to finance the purchase price; in which case a seller should be given adequate security. This could be a promissory note (preferably, cognovit in Ohio), a security agreement, a pledge agreement, or personal guaranties and other forms of security.

How to determine the purchase price?
The purchase price is a price that a seller is willing to sell, and a buyer is willing to purchase. Before discussing a purchase price with your buyer, consider having a valuation performed by an experienced and industry-specific appraiser.

Do I need a letter of intent?
In most circumstances, yes. The goal of the letter is to spell out the key terms of the future transaction. A good letter should contain the basic terms of the agreement. Letters of intent are generally not binding or enforceable; provided; however, such terms as confidentiality and exclusivity should be made binding. Please note that while the letter of intent is not binding, it will be difficult to renegotiate the key terms set forth in the letter, such as a purchase price or restrictive covenants. Therefore, the recommendation is to include in the letter only the basic terms that you are not looking to renegotiate, such as a price, the stock or assets that will be sold, treatment of accounts receivable, the manner of payment, restrictive covenants, and a closing date.

Should I handle due diligence myself?
You can, but we strongly recommend legal and accounting professionals assist in this process for a number of reasons. A buyer typically will request due diligence, i.e. critical information on your business, prior to any purchase before a letter of intent. However, any documents should be provided to a buyer only after a confidentiality and non-disclosure agreement is signed. 

What should I do if I am considering selling my business?
You should update all corporate records, minutes, licenses, registrations and applicable agreements. If the sale involves more than one owner, you should take steps to ensure the approval by all owners if necessary. 

What are other key factors during the sale?
If you plan on working for the buyer after the sale, consider entering into an employment or independent contractor agreement. You may want guaranteed employment during a certain period of time. Consider what your plans are after the sale, as restrictive covenants (non-compete agreements) are often a requirement of the buyer.

Mansour Gavin’s Business and Corporate Services Group understands the complex issues that can occur in business transactions and can help you navigate the process. We offer comprehensive legal guidance on all business-related matters that you may face when buying or selling business interests. Contact us today.

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