Let’s Make a Deal: When Selling a Business, Deal Structure is Key to What You Get
By Tim Dalton, President, Integra Business Brokers
You’ve decided to sell your business and you reach that happy day when you have what sounds to you like an acceptable offer. But an old saying in the business brokerage industry is, “It is not what you get, it is what you keep.”
Deal structure can mean everything in what a seller is going to keep in proceeds from the sale of their business.
When selling a business, there are mainly two types of transactions to consider, a stock sale or an asset sale. Typically a buyer will desire an asset sale.
In this type of transaction the buyer only purchases the assets of the business and does not purchase the stock or corporation from the seller. This represents probably 95 percent of all small- to medium-sized business sales. The buyer will form a new corporate structure and assume the assets of the business. This gives a buyer protection from any potential liabilities of the previous owner, as they are now a new company.
There are also some tax advantages to the buyer with re-depreciation of the assets that are purchased. A stock sale versus an asset sale will have different tax liabilities to a seller, but as mentioned, you can almost always count on an offer to be structured as an asset sale.
The next consideration is how is the sale going to be allocated? Different areas of the sale allocation have differing tax liabilities. As a general rule, the sales price is allocated into four general areas to include the furniture, fixtures and equipment value, inventory value, goodwill and a non-compete.
As a seller you will need to get with your accountant and have them determine what will be taxed as capital gains, ordinary income or other tax consequences as it relates to your specific financial situation. Other considerations could be consulting agreements paid to the seller as a form of compensation and seller-financed notes.
The last area that needs to be addressed is what happens with the cash in the company, accounts receivable/payable, work in progress or retainages. All these areas need to be spelled out in any offer from a buyer.
A real world example: A business we had listed for sale received two offers, one for $3.5 million and the other for $4 million. On the surface it looked like one offer was $500,000 better, but as we examined both offers with the seller, the lower offer of $3.5 million actually was going to net the seller more from the sale. In that offer the seller was going to keep the cash in the company ($400,000) and the receivables ($700,000), but he was also responsible for payables ($125,000). All told this added $975,000 to the $3.5 million, making the total pre-tax proceeds $4.475 million.
The second offer was for $4 million, but the buyer wanted cash from the company equal to the payables ($125,000) leaving the seller with $275,000 in cash. They wanted all the receivables ($700,000) and they wanted the seller to pay all current payables ($125,000). Some quick math shows the seller’s pre-tax proceeds would be $4.15 million. When compared to the pre-tax proceeds of the lower offer, the seller actually benefited an additional $325,000 by accepting the lower offer.
So when evaluating an offer to purchase your business, remember that how the deal is structured and what your tax liabilities will be need to be considered to determine whether an offer is acceptable or not.
Tim Dalton is president of Integra Business Brokers and has over 17 years of experience in the Augusta area assisting business buyers and sellers. Additional services include targeted business acquisitions, business valuations and financing assistance. Tim can be reached at 706-650-1100 or at firstname.lastname@example.org. Visit their website at www.integrabrokers.com.