Not everyone will agree but I am sure it’s closer to the truth than one might think: buying or selling a business is unlike anything else of value. To support my argument there are a number of reasons. Let’s look at some of them.

The price of a business is determined by a valuation. The rules of a valuation come from the law and then legal cases as well as the Internal Revenue Code and custom. The price for most other items of value are determined by market comparables (for example, when valuing a house), looking up a book or some online site such as Kelly Blue Book (for cars) or results from eBay or some other online service (for any item you can think of). That is, there is no legal interference with the value of any these items except a business.
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If you own a business and receive an unsolicited offer to buy your business please be careful. If your business is currently for sale be even more cautious. There are con artists that have developed a clever process of taking your business from you and leaving you not only with absolutely nothing, but totally destroying your business and leaving you in debt.

Here’s a basic breakdown of their process.
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All businesses have two classes of assets. They are either tangible or intangible. A tangible asset is property or something you can touch, for example a piece of land or a building. Other examples include a photocopier or desk and chair and these are collectively called Fixtures, Furniture and Equipment. Intangible assets cover a range of items and include goodwill, covenants not to compete, trademarks and trade names, licenses and permits and more. So a good question at this point is “Why do I want to know this and why do I care?”

The answer to the above question whether you are a buyer or seller is that when you are buying or selling a business, there are tax implications you need to know about. And this especially applies if you are the seller as it will affect the amount of money you put in your pocket once the business sells and eventually catches up with the buyer when they sell, plus during their ownership of the business with the depreciation they are able to take as a tax deduction. READ MORE

One of the hidden and sometimes very surprising scenarios which buyers and sellers of a business experience, comes when there is a need for both parties to agree on the Purchase Price Allocation. The surprise comes into play as most buyers and sellers have not heard of the Purchase Price Allocation and when it needs to be agreed upon, both buyer and seller can find it emotionally challenging, especially if the negotiations have been long and difficult.

So what is the Purchase Price Allocation? The Purchase Price Allocation is a tax reporting requirement on the sale of a business. Both the buyer and the seller must report their own understanding of the Purchase Price Allocation and the IRS can and does check to make sure both parties report the same information.

So where does the challenge come into play? The challenge comes into play because the buyer has a different tax need to the seller. That is, it’s the sellers preference to sell his stock of the company to the buyer as he does not need to pay back any taxes they have claimed as a deduction when operating the business. The buyer wants the exact opposite in that they want to buy assets, not stock, so they can start to depreciate the assets and thereby lower their tax bill.
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Small businesses are a critical part of the economic landscape. All the businesses on the Dow 30 started as small businesses, reached a critical mass that then led them to becoming a public company and grow to where they are today. Depending on whose statistics you use, small businesses make up 98% of all businesses in the US economy.
One of the benefits of being the owner of a privately held small business is that you get to take tax deductions that wage and salary earners are unable to claim. This is all part of the risk and reward scenario that comes from owning and operating a small business.

When it comes to selling the business, these tax deductions can get in the way as it reduces the true cash flow of the business, which affects the business valuation and therefore how much the buyer is willing to pay. To navigate this scenario, it’s important to understand how to deal with these legitimate tax deductions or as they are called, add backs.
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If you own a house and decide it’s time to sell, you have a choice. You can choose to handle the process on your own in which case you would be a For Sale By Owner (or FSBO) or you can choose to have a real estate agent represent you. If you own a business or are a potential buyer of a business you can choose to handle the transaction on your own or you can choose to have an agent or Business Broker represent you.

If you choose to have a Business Broker represent you, it’s worthwhile understanding that some Business Brokers belong to associations and these associations have a code of ethics. The International Business Brokers Association (IBBA) is an international association that brings together business brokers from many countries. At last count, there were approximately 28 countries in the IBBA.

The IBBA has a code of ethics and this includes the following articles:

Article 1 – Broker is charged with being knowledgeable with trends affecting business opportunities.

Article 2 – Broker must protect public against fraud, misrepresentation or unethical behavior.

Article 6 – Broker represents interest of their client but it is incumbent upon the broker to deal fairly to other party or parties involved.

In addition to the IBBA, there is the American Association of Business Brokers (or ABBA) plus there are many state or regional business broker associations. A few examples include the California Association of Business Brokers (CABB), Texas Association of Business Brokers, New England Business Brokers Association and many others.
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In the initial stages of listing a business for sale, all the attention is placed on getting the business in shape so it presents as strongly as possible, sometimes doing a business valuation to arrive at the most appropriate listing price for the business and discussing the tax implications to the seller of the business. Tom West is the owner of Business Brokerage Press and he has a great saying that most sellers and buyers don’t understand until they get into the negotiations of the transaction and it is – You name the price and I’ll name the terms.

In other words, price is important but the terms of the deal are much more important. And here are some thoughts why.

If a buyer made an offer for all cash and to close the sale in 30 days and another buyer made the offer subject to getting a loan and to close the sale in 60 to 75 days and you are the seller of the business, which offer would you want to accept? If they are both offering the same price for the business it would be a no-brainer to accept the cash offer.

Using the same scenario as above, but the cash offer was 5% less than the offer from the second buyer and you are the seller, which offer would you accept? Your answer would probably be – it depends. Some sellers may be willing to accept the cash offer and close the sale. Some sellers may be willing to accept the higher offer as the price difference of 5% could be more than enough to offset waiting 60 to 75 days to close the sale. Most sellers, I would think though, would include other factors into their decision. Which buyer do they think is more qualified to buy and operate the business? Which buyer would be able to get approval from the landlord to take over the lease? Probably the most important question the seller would want to know, however, if they accepted the offer from the second buyer, is what are the chances the buyer will get their loan application approved? If the seller is not sure the buyer would be qualified, taking the cash offer at a 5% discount may be much more attractive.
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Most business buyers don’t have a shortage of questions they want to ask when they are looking to buy a privately held company or business. There are obvious questions about the level of sales, qualifications and motivation of the employees, the relationship with the landlord, if payment to suppliers is up to date and many other good and appropriate questions.

Apart from these questions, there are others that may help a buyer decide if the business is a good fit for them. These questions include the following:

1. Does the business have any tax liens in place and are there any tax liens against the owner?

2. Does the business have any lawsuits pending?

3. How diverse is both the customer and supplier base?
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A transition plan that allows the business owner to sell the business for the highest price possible in the shortest amount of time to the most qualified buyer is generally the top of the wish list for most business owners. Because the business owner lives and breathes their business they become emotionally attached to their customers, employees, suppliers and other business partners as the business is a reflection of who they are.

Deciding to sell the business and move to a new role is much more complicated than most business owners realize. Sure, you can start by putting the business on the market and see what happens, but that’s not a good strategy. If customers, suppliers, competitors or others find out, it can severely damage the business.

So where does the business owner start? It’s my suggestion that one of the starting places is with a transition plan. A transition plan, at its simplest level, is an attempt to define the needs of the business owner and then systematically move to their desired outcome. And I am not just talking about the actual process of selling the business. I would suggest the owner go back to some more basic level and understand why they are selling, what they hope to achieve and probably most important of all, what are they planning on moving to and are they excited about it. If they are not excited about it, chances are they will do all the work to get the business ready for sale, advertise and market the business, qualify the buyers, negotiate a deal, do all the due diligence, prepare to close escrow and then change their mind because they would prefer to continue owning and operating the business than playing endless rounds of golf or become a full-time babysitter looking after the grand kids etc.
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The need to use seller finance when trying to sell your privately held company has come back into vogue due to the lack of third party finance being readily available.  Some techniques less known and used, however, are available but require a clear understanding between the seller and buyer and may then need good legal agreements to clarify, protect and define the responsibilities of each of the parties. Here are five options both a seller and buyer may want to consider.

Option One: if the seller of the business has created intellectual property or some proprietary idea that they don’t wish to sell as part of the business transfer, but the buyer needs that knowledge or invention in the business, the seller and buyer can enter into a licensing agreement. The buyer would pay an agreed fee as a royalty.
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The need to use seller finance when trying to sell your privately held company has come back into vogue due to the lack of third party finance being readily available. Some techniques less known and used, however, are available but require a clear understanding between the seller and buyer and may then need good legal agreements to clarify, protect and define the responsibilities of each of the parties. Here are five options both a seller and buyer may want to consider.

Option One: Allow the buyer to assume the sellers credit. Both parties need to be clear on their roles and responsibilities, but if the buyer is able to run the business and continue to buy all inventory or other items the seller always bought and paid so they earn a high credit rating, this can make the transition of the business easier to the buyer. If this method of financing is considered, an agreement should include a separate indemnification clause between the seller and the buyer making the debt the ultimate responsibility of the buyer. Using a good attorney is best to prepare this legal document.
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Seller finance that will enable a transaction to close between a business owner and a buyer in today’s economy has become a very important consideration in most business transactions; especially for privately held companies.  It’s become important not only because the banks have reduced their amount of lending but also because the banks are now reluctant to loan as much of the purchase price.  For example, if the buyer brought a down payment of 20 per cent the bank was willing to lend the remaining 80 per cent.

So the good old days are now behind us with the banks now preferring the buyer to bring a down payment of 20 per cent, the seller to carry a note of 20 per cent and the banks will then fund 60 per cent as long as the seller moves into second position.

This change of dynamics is making it difficult for sellers to decide if they really want to sell.  Many sellers are reluctant to carry a note because they are worried the buyer will not make that payment to them or the conditions of the loan may mean the seller does not start to get paid until 3 or 4 years after the transaction closes escrow.

There are down sides to seller finance but there are many upsides.  Let’s have a look at a few of them.
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A question that business sellers often ask is “Why an appraisal is critical to a Seller when selling their business.”  The best approach when selling your business is to make a list of all the items so there is no confusion about what is being sold. This includes isolating and reporting individually any real estate, inventory, fixtures, furniture and equipment, leasehold improvements, as well as assets that are not part of the sale.

Additionally, consider making a list of the current liabilities of the business and against that list, note whether it will expire when the business changes ownership, stays with the seller or will transfer to the buyer. Also, a better idea is to completely remove any personal or special items that will not be sold as part of business. This removes any ambiguity and becomes one less tension point in the transaction.

Once this is done, one of the first steps to selling the business is to get an appraisal on the business as a going concern. If you’re the owner of the business you may have an opinion about what the assets are worth but that opinion will not be acceptable to a genuine buyer. The best approach is to have a third party perform the appraisal for you.
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If you are thinking of selling your business, one of your first questions to answer is more than likely; where do I start?

One of your first starting points is to be clear exactly what is being sold. This may seem obvious but many Sellers think they will deal with it when they get an offer. So let’s break this down and look a little more closely at it.

The two most important things to a buyer when looking to acquire a business, is current cash flow and the potential of the business. From the buyer’s perspective, the cash flow is the fuel that feeds the business to pay the suppliers, employees, landlord, tax man, lenders and of course, leave something left over for them after all their work and capital investment in the business.

For the buyer to achieve the above, they need to purchase all the assets of the business so they understand what each asset does and how it contributes to the cash flow and/or potential of the business. As the seller of the business, it’s therefore important that you make it clear what those assets are and present them in the best possible light.
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What can you do if you cannot sell your business?  The current recession in 2008 and 2009 is marked by how low the economy has gone, the increase in unemployment but most frustrating of all, how long it has taken before the “green shoots” appear. If your business is struggling and you think your only option is to close the door and hand the keys back to the landlord, here are some things to consider.

If the business has excess fixtures, furniture and equipment, turn those items into cash by selling them. There are plenty of options to selling the goods including eBay and Craigslist. Make sure what is being sold is as presentable as possible but again, get some cash into the business and move unwanted items. This could include vehicles and real estate and other excess items. Hopefully the business has a current list of fixtures, furniture and equipment. If a list doesn’t exist, there is your starting point as you may be surprised what you have stored away.
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