Selling Your Business

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Selling a Sole Proprietorship

Beginning the Process of Selling Your Business:

Selling your business can be a complex or simple undertaking depending on the size, scope, and nature of your business.

For example, selling a medical practice or a manufacturing business will be more involved than selling a small quick print shop operating out of a shopping mall.

In any event, it's best to get legal and accounting professionals involved to help get you through the sale transaction smoothly and as quickly as possible.

As the seller, you will also have certain responsibilities to attend to.

For example, closing business bank accounts, notifying creditors, and negotiating the price for your business.

This section covers:

The Role of Your Attorney:

In selling your business you'll need to have a sales contract prepared spelling out the rights and obligations of each party to the contract.

You would be wise to use the services of an attorney to prepare the contract to ensure your interests are served.

Installment sale:

If you sell your business on an installment basis, the services of an attorney will be particularly important because of the inherent risk of extending credit.

For example, your attorney will include in the contract your legal recourse should the buyer default.

In an installment sale, your attorney may prepare a conditional sales contract where you retain title to all property transferred in the sale until you receive final payment.

A promissory note will have to be prepared indicating payment terms.

An additional concern of yours, if the sale is an installment sale, will be the buyer's experience in operating the type of business he/she is buying.

Lack of experience may lead to business failure causing the buyer to default on his/her payment obligations.

Get a down payment: It would be a good idea to receive a substantial down payment before agreeing to an installment arrangement. This way, if the buyer defaults, at least you would have received something out of the deal. Then, hopefully, you can resell the business.

Outright sale:

In an outright sale, your main concern will be the financial qualifications of the buyer.

Does he/she have the resources to buy your business?

If not, you can end up spending a lot of time with the prospect answering questions, providing business records, and documents, all for nothing.

Don't waste your precious time. Discuss a strategy for screening out empty barrels with your attorney.

Business brokers: If you don't mind paying a commission to a business broker for helping you sell your business, a business broker can screen prospects for you.

The services of a good attorney would be a smart move on your part even if you involve a business broker. A business broker will want you to sign a contract. Before signing, let your attorney review the contract.

Selling your business is an important event, do it right. Protect yourself, legally!

Your attorney may prepare a variety of documents, some of which may include:

Generally the above documents are typically prepared when selling a sole proprietorship.

However, there may be other documents required to complete the transaction depending on the rules of your state. A competent attorney will guide you through the process.

The Role of Your Accountant:

One of the many important services your accountant can provide when you're ready to sell your business is helping you set a price for your business.

For example, one approach for setting a price is based on some multiple of your annual net income (e.g., 10 times net income).

Regardless of how you go about setting a price for your business, what is important to a potential buyer is being able to justify the price you're asking.

A serious prospect will want to see your books and records, financial statements, tax returns and any objective information to corroborate the information reported in your books, records, and tax returns.

Questions will be asked and answers expected. You'll want to be responsive to the prospects needs and concerns so as not to create any frustration.

Your accountant will help to ensure that the prospect has all his/her financial and tax questions answered and that requests for financial information are met timely.

By satisfying the needs and concerns of the prospect in a timely manner you'll be more likely to achieve your goal of closing the deal to your satisfaction.

If you enter into an installment sale, your accountant will set up a payment schedule. A payment schedule will help you keep track of interest and principal payments received.

Each year you must report interest income and the amount of gain recognized on the installment payments received for the year.

And finally, let's not forget the IRS.

Your accountant will help to ensure your tax obligations are met.

After all, once you receive that bundle of cash from selling your business, you won't want any tax problems related to the sale to surface at some future date!

Accounting and Tax Services You May Need:

Your Role in Selling Your Business:

In addition to legal and accounting services that may be needed when you sell your business, you will have certain responsibilities to attend to as well.

Eight things you may need to do:

1) Notify your creditors:

The Bulk Transfer provisions of Article 6 of the Uniform Commercial Code and the Bulk Sales Acts (a class of statutes to protect creditors) both address notification to creditors of an impending sale of inventory sold in bulk and not in the ordinary course of business.

These notification rules generally do not apply to service businesses because the sale of merchandise is not the major source of income.

The purpose of the notification requirement is to protect creditors from being defrauded by the secret sale of retail inventory in bulk.

The idea is to keep you from pocketing the money from a bulk sale of your inventory then disappearing and leaving your creditors holding the bag.

2) Business bank account(s) and direct debit arrangements:

After all payments have cleared your bank, you'll need to close your business accounts and cancel any business-related direct debit arrangements that exist.

A final bank reconciliation should be performed.

3) Business insurance:

Cancel unnecessary business-related insurance policies. For example, workers' compensation insurance (if you had employees).

4) Business services:

Cancel any business services no longer needed (e.g., janitorial services, etc.).

5) Taxes:

Ensure that your taxes are up to date, including employment taxes and sales taxes (if any).

6) At year end:

7) Employment taxes at year end:

This applies if you had employees.

A sole proprietor is not considered an employee of his/her own business except for retirement plan purposes. For example, if you se up a SIMPLE plan you are considered both and employer and employee for the purpose of making plan contributions for yourself.

8) Recordkeeping:

Make sure you keep copies of every document related to the sale of your business in a safe place.

In an outright sale, keep such documents at least three years after the due date of your return, or the date you filed your return that includes the sale of your business, if later than the original due date.

If you sold your business on an installment basis, keep your records for a least three years after the year the final payment is received and you filed your tax return which includes the interest income and gain recognized on the final installment payments.