The Strategy Behind Selling Your Business

February 12, 2015

This article is Part 1 of a 2 part series focusing on selling your business.

Sales of businesses were up in 2014 and this trend is expected to continue in 2015.

Mergers and acquisitions hit a record high in Texas in 2014, with almost 70% of these being privately owned businesses. The number of small businesses sold in the United States hit a record high in 2014.

Frequently, the equity a business owner holds in his business is his greatest single asset. Baby Boomers account for 77% of the wealth in the United States. Many business sellers will be Baby Boomers looking to retire and leave businesses they've spent their lives building.

Part 1: Strategy

It takes significant planning and preparation to successfully exit a business. Understanding the strategy behind selling your business will help you make decisions concerning your business, both today and when you sell it.

Timing. The best time to sell a business is when the business is doing well. What do you need to get out of your business? What are your retirement needs? What will you do once you sell your business?

Buy-Sell Agreements. One of the most disruptive events to a small business is the departure of one of the owners. If you have a partner, do you have a succession plan? Or a buy-sell agreement in place so the business or the other owners can reacquire the ownership interests of the person who leaves the business?

Price. Business owners frequently believe their business is worth more than it really is. What kind of return on investment do buyers expect and what returns can your business deliver? Have you had your business valued? The general economic outlook and the growth projection for your industry affect both the sales price and the time it will take to sell your business.

Buyers. Potential buyers may be a competitor, a third party, employees, or family members. Oftentimes a competitor knows the market and understands the business, so he may better appreciate the value of your business. A competitor may see the acquisition of your business as an opportunity to expand and offer you the best price for it.

Understand the market. Research the marketing trends in your industry. Potential buyers are frequently looking for growth potential, and want to invest in an emergent market or business. These projections will significantly affect your selling price and provide insight into the probable time it will take to sell your business.

Structuring the Deal. Buyers generally prefer structuring the transaction as an asset purchase, buying the assets of the business, since they are not assuming unknown seller liabilities. However, that there may be important reasons why an entity purchase, buying the ownership interests of the business, makes sense, such as maintaining existing contracts, permits or licenses.

Financing. Buyers frequently expect sellers to offer some amount of seller financing. A buyer may also insist on certain arrangements, such as earn-out agreements, revenue sharing agreements, or holdbacks, to help ensure that the business will perform at its existing level.

Tax Issues. Analyze and understand the tax consequences of a potential sale. The seller will be taxed on the profit he makes from selling the business. Generally the federal tax rate on gains from the sale of business assets ranges from 15% (long term capital gain) to 35% (ordinary income rates). The buyer and seller must reach an agreement on the allocation of the purchase price to the specific assets acquired. If the buyer is allowed to pay the purchase price over an extended time period, the seller may be able to defer some of the gain on the transaction until payments are received.

Ongoing Obligations. Frequently, the buyer will need help transitioning into running the business. It is also very common for the buyer to require that the seller agree not to compete against the business for a certain period of time. In addition, the seller usually is required to make certain representations and warranties and indemnify the buyer for certain liabilities.

Selling a business is a complex transaction. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or kathy@tremmellaw.com.

Topics: Legal

Kathy Tremmel

Tremmel Law

Kathy Tremmel has significant experience both as a business attorney and corporate executive. Her career spans both legal practice and business management and she opened her own solo law practice in January 2010. In additional to running her own practice, she also is of Counsel with Selman, Munser & Lerner, which is a business transaction law firm in Austin, Texas. Ms. Tremmel has more than 10 years’ experience as a business attorney, providing transactional legal services to a diverse client base, from start-up ventures to well established companies. She helps companies with all their contracts, including customer agreements, non-compete agreements, employment agreements, buy-sell agreements, loans, and leases, helps people set up new businesses, and represents buyers and sellers of businesses. In addition, Ms. Tremmel has 10 years of management experience working with start-up companies. As VP of Operations at Tusker Group, an international litigation support company, Ms. Tremmel led international teams, managed production and quality issues, handled price negotiations, worked closely with clients to determine the scope of their projects, provided project management services, and developed, implemented and documented best practices for processing and training. Ms. Tremmel earned a Doctor of Jurisprudence from the University of Colorado School of Law and a Bachelor of Arts from Dartmouth College. She is a Texas licensed attorney and a certified Project Management Professional.
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