Category: Business Sale

Here are three ways business owners can turn younger family members into eventual company owners, short of buying the company with ready cash (with its various tax implications).

OWNER FINANCING

Also known as the installment plan, you might create an agreement with the help of an attorney to receive a down payment on the sale of your business, with the rest paid in installments.

Pros include potentially lower interest on payments for the buyer and a stream of income the seller can use in retirement. Cons include less cash flow for the new owner to operate the company and the chance installment payments to the previous owner will stop before full payment.

SINKING FUND

If you have a well-structured buy-sell plan and intend to pass the business on in a specified number of years, you might consider establishing a sinking fund, which becomes a company asset until used to purchase the business. You can schedule regular payments to an interest-bearing account or investment-type fund, with funds growing over time to theoretically fund a future purchase.

LIFE INSURANCE

You may also want to examine the potential of funding a cash value life insurance policy to use in the future purchase of the business. Like a sinking fund, the life insurance policy becomes a company asset. Unlike a sinking fund, which doesn’t help if the existing owner dies before the fund accumulates sufficient cash, life insurance covers a potential sale, whether unexpected or planned.

GET HELP

Work with your legal and tax professionals to better understand the tax implications for you and family successors before deciding which funding method to choose.

When business owners want to sell their companies to non-family purchasers, they have a number of ways to achieve this goal. First, get a current business valuation. Make sure your company’s books are in order, as well as contracts that involve future business and income.

INSIDE OR OUT?

If you have partners who want to remain in the business after you leave, work with an attorney to draft a buy-sell arrangement. Another way you might keep the business in familiar hands is to explore the use of an Employee Stock Option Plan. Your tax and legal professionals can provide the details for each approach.

Then, if you want to still sell your business on the open market, work with your tax and legal professionals to establish the optimal price and purchase agreement.

While preparing to sell your business you’ll need to create these key documents for any potential buyer.

FINANCIAL RECORDS

These include income statements, balance sheets, and cash flow statements for the past three to five years. Additionally, you’ll need tax returns and bank statements.

BUSINESS PLAN

The business plan provides an overview of the business, its strategies, and its market position.

LIST OF ASSETS

This document details all physical assets including equipment, inventory, real estate, and intangible assets such as patents, copyrights, and trademarks. Include purchase date, cost, and current value.

LEASES AND CONTRACTS

Copies of all current leases for premises, equipment, and vehicles and contracts with suppliers, customers, and employees should be compiled.

LEGAL DOCUMENTS

This includes the articles of incorporation for corporations or articles of organization for LLCs, partnership agreements, and any licenses and permits required to operate the business.