The best time to transfer the ownership of your business is BEFORE you walk into the office and have the feeling that “I don’t want to do this anymore.” Have you thought about what you will do after you don’t have to go to work? Do you have a “backburner” list of places you’ve always wanted to go or things you keep putting off that you want to do?
Businessowners have three general avenues for transitioning the business:
- Sell to an outside party.
- Sell internally to employees or family.
- Close the doors.
No matter which road you take, you should answer some important questions before you even get started.
- Do your accounting records (and tax returns) truly represent the past performance of the business? A buyer’s due diligence will focus on your records and affect the offering price.
- Is all revenue recorded in the books? This also affects the sales price and financing.
- Can personal expenses paid by the business be readily identified and culled to give a better financial picture of the operations?
- Are there assets on the depreciation schedule that the business no longer has or uses? If so, the income tax could be higher on a sale because of depreciation recapture.
- Where are the vehicle and trailer titles? Does the owner name on the title match up with the insurance coverage name and the depreciation schedule used for the business? If there is improper alignment of insurance coverage, significant liabilities to either the business or owner could result in the event of an accident.
- Whose name is on the financing agreement with the bank on vehicle loans?
- Did you receive money during the COVID-19 era from a PPP or EIDL loan? There is extensive legal conversation, at this time, regarding how to write sale documents to protect both seller and buyer.
- Do some vendor accounts have personal guarantees that need to be transferred to a new owner?
Sale to an Outside Party
The following are some things to think about before you even list your business for sale to an outsider.
- Very carefully choose your advisory team of tax advisor, business broker, attorney, and financial planner, and determine that they have prior experience in business sale transactions. If not, find someone who does, even if you need to engage a specialized advisor for this purpose.
- Take a GOOD look around and pretend you walked into the business for the first time. What is your first impression? Is there a “boneyard” of old and unusable equipment out back, leaning against the fence? Are the office and restrooms inviting for a visitor? Could you see yourself coming to this business every morning and feeling good about your day?
- Are there employee and independent contractor agreements and contracts to address, whether written or verbal?
- Realistically determine whether you are a “doer” or a manager of doers. This affects the type of buyer who might be interested.
- How long are you willing to remain at the business to train and transition a new owner?
- Are you willing to finance a portion of the sale? (Current SBA financing rules will require you to have “skin in the game”.)
Transition to Family or Employees
- Do you want to gift the business or sell it? Even if you sell to insiders, the previous list is still imperative to address.
- Will you actually be able to remove yourself from the business and work on your bucket list?
- Are taxes your most important consideration? If so, holding the business until your death rather than gifting or selling it during your lifetime is most tax efficient.
- How does this work out with your previously determined will provisions? Do you need to revise your will?
Close the Doors & Walk Away
Not too fast! Many things still need to be done to close down a business. If you have to go to all that work anyway, why not realize some cash for all your years invested in the business? The following are some things you need to do, even if you close the doors.
- Terminate the property lease and negotiate termination with the landlord.
- Pay off outstanding loans, whether to banks or individuals. (Those PPP loans have a long audit tail by the SBA.)
- Extinguish personal guarantees on vendor agreements.
- Close down all the business credit cards.
- Terminate the federal and state payroll and unemployment insurance accounts.
- Close all bank accounts and transfer assets into your personal name.
- Terminate the company registration and/or trade name with the Secretary of State.
- Terminate all monthly services such as IT contracts, utilities, internet, etc.
- Sell remaining assets or legally transfer them into your personal name. Remember that all titled vehicles need to be retitled to the successor owner and corresponding insurance coverage transferred.
- File final federal and state income tax returns.
In the interest of space, these lists are very brief. An article could be written about every point on the list. But, this should get you thinking about what avenue you might want to pursue, before the transition of your business becomes a crisis or something someone else has to do if you can’t.