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Selling Your Business to a Buyer

By Justin Krane

Republish: EasyPublish™ Published: 15Mar2012 Word count: 675 Viewed: 61 time(s) Get Free Content For Your Site

How to Structure a Deal for Selling Your Business

There are so many ways you can go about selling your business and it's another source of cash to fund your retirement. You can sell it outright to a buyer or you can merge with another firm. In either case, finding the right buyer is key.

Why? Because if you sell your company to a buyer that doesn't share your values, your clients/customers will leave. And if you care about what happens to your clients after you're gone, then selling to a buyer who shares your values is really important.

One great way to assure a smooth transition is to bring in a partner before you plan on selling your business. Another option is to make a key employee a partner by giving him/her equity. You could also work with a business broker. Or, you could spread the word through your contacts such as your attorney, CPA and any other trusted advisor who might know a buyer worthy of your business.

Most business values are determined by the business results over the last 3 years. Before selling your business, there are some key things that will determine its value.

Transition risk of client base: The easier you are able to transition your clients to the buyer, the more your business is worth. For example, say you do business with your clients on a face to face basis but you find out your potential buyer solely does business over the phone. Obviously this is not a good match. Your cash flow: Your revenue stream needs to be as predictable as possible. You also want to make sure that you do not have only a few clients who make up a big portion of your revenue. Also, the age range of your client base needs to be as diverse as possible. This creates a more long lasting revenue stream. >Here is a possible math scenario for selling your business:

Let's assume your last 12 months of sales are $250,000 and you are selling your business to a junior person at your company.

Let's say the sales price is $500,000. You could ask for 20% down or $100,000. You could then issue a promissory note for $175,000. You are basically lending the buyer the $175k and he is making monthly payments, say at a rate of 6%, for a period of 4 years. So you now know exactly how much money you will get paid every month.

A third and final phase of the deal is called an earnout. The buyer pays the seller a percentage of the future revenue for an agreed upon period of time. In this case, the buyer has paid $275,000 and is still on the hook for another $225,000.

The buyer can pay the seller 10% of the seller's revenues after each year. This motivates the seller to successfully transition the clients to the new buyer. The use of this earnout may increase or decrease the final purchase price.

The tax treatment in all of these types of sales varies. Many of these sales can allow the seller to use long term capital gains tax rates and not ordinary income tax rates on the sale. (Please consult your tax professional for more information.)

Bear in mind that this is only one way that you could structure a deal for selling your business. There many, many other ways you can structure the transition to achieve the outcome you want.

But here's the bottom line. Make your business a lucrative one that's attractive to potential buyers. Develop a plan to monetize the value of it. Your customers will continue to get taken care of and you could be handsomely rewarded.

I see so many entrepreneurs close up shop and leave huge money on the table. If you have any questions about selling your business, please feel free to give me a call.

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