How to Structure the Sale of Your Business

Founders and entrepreneurs cannot continue to work in their positions forever. They may have different future plans or feel burnt out with the same exhaustive routine. Thus, when they decide to exit, they need to determine the structure of the sale. The composition of the agreements depends on the reason for the sale and helps lay down the deal structure, terms and conditions. Selling their venture is the most significant decision in the lives of entrepreneurs.

Therefore, they must pay attention to the outcome of the deal rather than just moving to the next endeavour. They must work on making the highest profit while securing the terms that will help them to safeguard their future income, whether they wish to retire or remain partially involved in the business. So, here are the ways of structuring the deal to get the maximum benefit as per your needs.

Two Types of Business Sales

Before understanding the structure of the sale, the seller must understand the concept of sale types. Whether you sell business online or through your network in the industry, it is vital to know the two main types of business sales that decide the tax implications.

1. Asset Sale

This type of sale entails the sale of specific assets and liabilities. However, the cash available with the business and its long-term debts remain with the seller along with the control of the legal entity. For example, the buyer will acquire the intellectual property, goodwill, equipment, fixtures, and some liabilities during an asset sale. Usually, the net working capital is also a part of this type of sale.

However, sellers do not prefer an asset sale because it incurs higher taxes as compared to a stock sale. On the other hand, buyer’s favour this sale as they can claim tax deductions for depreciation and amortisation. Also, they can choose the liabilities they wish to assume, so they can avoid getting into liabilities that have pending lawsuits or disputes.

2. Stock Sale

In this type of sale, the buyer acquires shares of the business and gets the control of the legal entity along with its assets and liabilities. If the buyer does not want to acquire certain assets or liabilities, they are removed from the transaction through distribution.

Sellers who wish to sell their business through this process incur lower taxes. However, buyers feel the other way round and do not opt for this type of sale as they have to pay higher taxes.

Standard Payment Terms For A Business Sale

How the buyer makes the payment for the business decides the payment terms. A few of the prevalent methods are mentioned below.

• Outright Sale

When the seller wants to give up the ownership of the business completely for retirement or due to grave illness, they opt for this deal. It allows them to get the full payment as soon as the business is handed over to the buyer. They only have to stay back for a few months to train the new buyer and can then move on without any association with the going concern.

• Deferred Payments

The deferred payment sale allows the buyer to pay for the acquisition in instalments instead of paying the entire amount upfront. The seller agrees to these terms when the buyer is qualified but does not have the funds for the one-time payment. However, due diligence of the buyer is necessary to avoid mistakes while selling your business.

For example, if the asking price is $1,75,000, the buyer can pay $50,000 at the time of the purchase and then $25,000 at the time of the final handover. The remaining $100,000 can be paid over the next few years. Many sellers prefer this payment term because they get a higher price and have to pay lower taxes if they report the income in the same year of the sale.

• Earnouts

The earnout conditions are agreed upon by both parties when the buyer is not sure about the future viability of the business. In such a case, they pay a part of the asking price at the time of the purchase and the remaining amount depends on the performance of the business. The conditions of the payments usually depend on the ability of the business to retain customers and grow further.

The seller stays with the company in this type of arrangement until the payments are completed according to the conditions of the earnout sale. The payments incur taxes for the seller, but since they are spread over a period, they are not burdened by a large amount. When the seller is paid by the buyer while staying involved in the business, his income gets taxed in a regular manner.

• Seller Financing

Some wealthy sellers who sell business online or through their network provide finance to the buyers instead of them applying for a loan from a financial institution. Thus, the buyer pays a defined amount at the time of purchase and the remaining as mortgage payments. However, this type of sale is risky for the seller because the buyer may not be able to run the business successfully and fail to pay the instalments.

It can lead to losses and legal disputes. However, if the seller wishes to go ahead with the arrangement, they must offer a small amount of the purchase price that can be retrieved quickly. Also, they must evaluate the credit history of the buyer before getting into this type of payment arrangement.

Endnote

If you are preparing for the sale of your business, you need to know about the sale types and payment arrangements to structure the deal effectively. Do not make haste and incur losses. Equip yourself with the required knowledge and hire professionals to get the best return on your investment.