Factors to Consider When Buying or Selling a Business
Small Business TimesMarch 24, 2008
An experienced business owner understands the challenges of running a successful business. Along the way, there may be opportunities to grow and expand the business by acquiring another business. There may also be a point in time after having seen through this growth and expansion that the owner is ready to retire or start something new.
Whether you have owned a business for many years or are just starting out, buying or selling a business is a unique challenge, and one that you may not have faced before. There are a number of factors that should be considered as you work toward making your decision.
Develop Your Strategy
One of the first things you need to do is identify the goals that you intend to achieve with the transaction and then develop a strategy to achieve those goals. As a seller, do you want to stay involved in the business? Is it important to you that the buyer share your vision for the business? Are you simply ready to move on? Some buyers, such as competitors or similar companies looking to integrate the business into its existing operations, may have plans for the business that do not involve the seller. Other buyers may simply see the business as a good investment and will need the seller's experience and knowledge to achieve the desired return on that investment.
Select Your Team
Selecting a team of advisors to assist you in achieving your goals is an important part of the process. An attorney specializing in business transactions can help you structure and negotiate the transaction. In addition, an attorney is an excellent referral source for accountants, financial advisors and banks. Your advisors will help you analyze the risks and benefits of the transaction, and facilitate communication between the parties during the process.
Choose the Appropriate Structure
The tax consequences of the transaction typically influence the structure of the transaction for both the buyer and the seller. Each possible structure, including a sale of the owner's stock, a sale of the assets of the business, or a merger with another existing business, will have different tax consequences to the buyer and the seller. The tax consequences depend on a number of factors including: the seller's entity type, the tax basis and fair market value of the assets, and whether the seller is willing to accept payment over time or some form of payment other than cash, such as stock of the buyer. Your advisory team will help you understand the tax impact and how to maximize any tax benefits.
Determine the Right Price
As a seller, you may have an idea of the value of your business even before an offer is made. Detailed financial information, including historical and projected earnings, documentation about how the business has been run and is continuing to be run, and market research are all key elements for buyers. These elements will help support the seller's asking price. Likewise, this information will justify the value of the business to the buyer, particularly if the buyer is financing the acquisition.
The allocation of risk between the buyer and the seller for known or unknown issues is a key part of the negotiation process. The buyer wants to ensure that its investment is protected against claims related to events that occurred when the seller owned the business. The seller desires finality and to be relieved of the risks of owning a business.
The buyer may manage risk in a number of ways: through the due diligence process, the liabilities of the seller that the buyer is willing to assume, representations made by the seller about the condition of the business and the buyer's right to reimbursement from the seller for losses related to the seller's operation of the business. The seller may manage risk by limiting the scope of the representations that the seller makes to the buyer and limiting the seller's obligation to reimburse the buyer for any losses.
Making the important decision to buy or sell a business is just the beginning. There are a number factors that you will need to consider as you step through the process. With the help of a strong advisory team, you will be able to develop the right strategy and achieve your goals.