Selling a small business is a much more complex process than many small business owners expect. Sometimes, finalizing a sale can take several months, and many small business owners will need to start preparing for the sale of a business in advance. Learn more about the steps to selling a business, the taxes on selling a business, and how to evaluate offers for your business.
What Should You Do If You Receive Multiple Offers for Your Business?
Receiving multiple offers for your business can be very flattering, but it also means you have your work cut out for you. Ideally, you will want to finalize the sale of your business with the buyer who has the best offer. But determining the quality of each offer calls for an eye for detail and a knowledge about the law and tax code that most business owners don’t have. That’s why it’s a good idea to contact an M&A expert to help you determine the best offer.
Closely Review the Purchase Agreement
When you are comparing multiple offers, it’s nearly impossible to compare offers apples-to-apples. The terms offered from buyer to buyer will vary: some buyers may want to keep you on as a silent partner; others may want to offer you stocks instead of cash. This is why it’s essential to closely review all the details of the proposed purchase agreement.
It’s very common for buyers to amend your initial offer with terms they are more comfortable with, such as changes to the closing agreements. As you review the purchase agreement with your financial advisor, it’s best to keep in mind the goals you set when you decided to sell your business. This can help you settle on the offer with the best deal for your goals.
Evaluate Soft Elements
Aside from the purchase price proposed in the purchase agreement, which can sometimes include stock value instead of cash, you and your financial advisor will also need to evaluate the soft elements of the deal. Soft elements are more personal than hard elements. While hard elements tend to focus on profits, soft elements focus on the integrity of the new buyer and their plans for the business.
Some business owners may not care what happens to the business after it’s sold, but most want to be reassured that their business is going to be left in good hands. Most business owners also want to ensure their employees will still be taken care of, as well. This is why you will want to ask frank questions about how a potential buyer feels about your business or what a buyer plans to do with the business while you are evaluating the purchase agreement.
Consider Buyer Motivation
It’s also a good idea to consider the motivation of the buyer, since this can influence how soon a deal can be closed and may also make it easier to negotiate for a better price. A buyer that is more highly motivated will be willing to offer a higher price or include more favorable terms to the seller in the purchase agreement.
Negotiate With Each Buyer
Finally, if multiple buyers are interested in purchasing your business, one of the smartest things you can do is play the buyers against each other to get a better deal. Sometimes, buyers with dissimilar offers end up in a bidding war over your business, which gives you the opportunity to negotiate for better offers.
In some cases, you may be able to see if one buyer will include provisions offered by another buyer as a way to get a purchase agreement with all the terms you want. If you find yourself in these circumstances, the best thing you can do is discuss your negotiation strategy with M&A experts and advisors.
What Are the Steps to Selling a Business?
There are several steps to selling a business, such as understanding the value of your business, cleaning up business financials, and making plans for the future. Growth is the name of the game so if business owners can increase sales to produce a better business portfolio before the business is put on the market, this will make your business look more attractive. When you work with an M&A firm, the steps for selling your business may include:
Calculating adjusted EBITDA
Developing a customized buyer pool
Creating an Executive Summary
Create a CIM and Data Room
Vet buyers and acquirers
- Negotiate Letters of Intent (LOIs)
Negotiate Purchase Agreement
Finalize closing agreements
One of the most common closing agreements that may be part of your sales terms is a non-compete agreement. This agreement prohibits a seller from developing a similar business for a specific period of time after the business has been purchased. The goal of this agreement and other closing clauses is to give the new business owners a chance to turn a profit without direct competition.
What Are the Taxes on Selling a Business?
When you sell your business, you will likely incur a capital gains tax on the profits from the sale. Capital gains tax rates are determined by your ordinary tax bracket if you have owned the asset for a year or less, while the capital gains tax rate for an asset owned for more than a year can range from 0% to 25%. In any case, the capital gains tax rate can be an expensive addition to your personal taxes if you don’t have a financial plan in place.
There are several things you can do to reduce capital gains after you sell your business, such as selling stocks to limit tax reporting or structuring the purchase agreement as an installment sale. Some qualified C corporation businesses can also make an S election, which can reduce capital gains taxes significantly. It may also be a good idea to reinvest your profits into an Opportunity Zone, which can help defer capital gains taxes in the future.
Why Do You Need an M&A Advisor?
Selling your business is a major financial decision, which is why one of the best things you can do as a small business owner is to contact an M&A advisor to help you through the process. Your advisor will have knowledge about strategies that can help you throughout the process of selling the business so you are not being taken advantage of by the buyer.
Furthermore, a financial advisor can help you plan your next steps. If you want to turn your profits into the seed money to start a new business, or if you want to invest in real estate, your advisor can help you make the smartest choices. Additionally, if you are uncertain about your financial future, your financial advisor can help you make plans for the future, such as reinvesting your profits to diversify your investment portfolio.
If you are ready to sell your small business, you must be sure to follow each step of this process perfectly, so you can take advantage of tax laws that apply to your circumstances. For business owners who feel more comfortable with expert guidance, it’s best to get in touch with an M&A advisory firm, so you can negotiate the best possible purchase agreement. Reach out to ASA Ventures Group to start planning the sale of your business today.