Anyone thinking of buying or selling a business must consider multiple issues long in advance of the sale. This article will discuss just some of those issues and encountered by business owners when selling a business.
Business owners must organize and collect their business records many months before they even consider selling their business. Owners will likely need to disclose may records to potential buyers both during negotiation and prior to the closing of the sale. Many business owners are surprised when they realize the amount of information that they will disclose to a potential buyer. The records include tax returns, bookkeeping records, bank statements, vendor and supplier information, current contracts or other liabilities that will exist after the sale. The buyer’s conduct during this time period before sale is often called “due diligence,” which involves the buyer’s investigation of a business’ financial history and amount of information will depend on the type of business and the circumstances.
A business owner should understand the amount of information that may be requested by a buyer before a sale and be ready with this information. Buyers may also request during due diligence corporate records, employment agreements, payroll records, deeds or leases, insurance policies, inventory lists of property, client lists, liabilities, vendor contracts, retirement plans, and litigation documents or claims. Buyers will often want specific information provided by a seller before buyers will move forward with the sale. By planning ahead, a seller will save time and effort by collecting this information. Sellers of a business should discuss with their attorneys whether confidentiality agreements should be entered into with the potential buyers before disclosing certain documents or information.
Buyers will also seek information about any pending or potential litigation or claims against a business. If a business is involved in litigation relating to customer or vendor disputes, employee wage or discrimination claims, or any environmental matters, the prospective buyers may walk away from the sale. Business owners must disclose this information to a potential buyer before the sale. A seller’s failure to disclose such information about possible claims against the business may result in future litigation with the buyer.
The various types of business entities, from sole proprietor to corporations, have different tax treatment and issues. Businesses owners should consult with their accountants to understand whether the type of business entity will have any tax implications upon the sale of the business. Business owners may need to change the type of ownership entity in some cases to realize any applicable tax benefits.
Business owners must consider the assets they will transfer with the business. Assets not only include inventory, equipment, real estate, contracts, client lists and other tangible assets, but also non-tangible items such as the business’ name and its goodwill.
Business owners should cultivate strong working relationships with attorneys and accountants because these professionals will assist them with the details related to the sale transaction. From drafting the sale documents to advising on the tax consequences, these professionals provide an invaluable asset during the sale and purchase of a business.