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If you want the help of a trained professional—and we’ll always point out situations in which we think that’s a good idea—consult an attorney licensed to practice in your state. please note 3rd edition The Complete Guide to Selling a Business by Attorney Fred S. Steingold THIRD EDITION SEPTEMBER 2007 Editor ILONA BRAY Cover Design SUSAN PUTNEY Book Design TERRI HEARSH CD-ROM Preparation ELLEN BITTER Production SARAH HINMAN Proofreading ROBERT WELLS Index NANCY BALL Printing CONSOLIDATED PRINTERS, INC. Steingold, Fred. The complete guide to selling a business / by Fred S. Steingold. 3rd ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-1-4133-0706-1 (pbk.) ISBN-10: 1-4133-0706-X (pbk.) 1. Small business Law and legislation United States Popular works. 2. Sale of business enterprises Law and legislation United States Popular works. I. Title. KF1659.Z9S762 2007 346.73'065 dc22 2007013038 Copyright © 2004, 2005, and 2007 by Nolo ALL RIGHTS RESERVED. PRINTED IN THE U.S.A. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the publisher and the author. Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. Quanity sales: For information on bulk purchases or corporate premium sales, please contact the Special Sales Department. For academic sales or textbook adoptions, ask for Academic Sales. 800-955-4775, Nolo, 950 Parker Street, Berkeley, CA 94710. Acknowledgments I wish to thank Emily Doskow for her superb editing of the 2nd edition. Thanks also to: Marcia Stewart for building a strong foundation for this book in its first edition Jake Warner for his many helpful contributions and unflagging encouragement Mark Hartley, CPA, for his analysis of tax issues Glen J. Cooper for his insights regarding business brokers Terri Hearsh for her production magic André Zivkovich and the Applications Development Department for creating the CD-ROM, and Susan Putney for designing the great cover. About the Author Attorney Fred S. Steingold is an expert on business law, advising entrepreneurs on how to start, buy, run, and sell businesses. He is the author of Nolo’s Complete Guide to Buying a Business, Legal Guide for Starting and Running a Small Business, and The Employer’s Legal Handbook. His monthly column, “The Legal Advisor,” is carried by trade publications around the country. Introduction Your Companion for Selling Your Business Is is Book for You? 2 Will You Still Need to Hire Lawyers, Accountants, or Other Professionals? 4 Part 1 Overview of the Process 1 Deciding Whether—And When—To Sell Deciding Whether or Not to Sell Can Be Agonizing 8 Do You Have a Saleable Business? 10 Working Out Problems With Your Co-Owners 15 Choosing the Best Time to Sell 17 If You Need to Leave the Business, But the Time Isn’t Right to Sell 19 Staying Involved With Your Business 20 Protecting Your Future Ability to Earn a Living 22 2 e Key Steps in Selling Your Business Figuring Out What Your Business Is Worth 24 Preparing Your Business for Sale 25 Creating a Plan for the Future 26 Marketing Your Business 26 Negotiating the Deal: Key Sale Issues 27 Signing a Sales Agreement 28 Closing Your Sale 29 Table of Contents 3 e Key Legal Issues in Selling Your Business Take Presale Legal Protections 32 Understand the Differences Between Selling the Business Entity or Just Its Assets 33 Be Clear on What You’ll Sell and What You’ll Keep 36 Understand the Transfer of Intellectual Property 37 Protect Yourself Against the Buyer Failing to Make Payments 38 Assure Your Ability to Earn a Living Later: Guidelines for Noncompete Agreements 39 Limit Your Legal Liabilities to ird Parties Once the Business Changes Hands 40 Protect Yourself Against Unintended Liability to the Buyer 44 Comply With State and Local Laws at May Affect Your Sale 45 4 Tax Considerations When Selling Your Business An Overview of Key Tax Issues 50 Understanding the Federal Tax Rate at Applies to Your Sale 53 Tax Issues When Selling the Business Entity 54 Selling the Assets of a Business 58 Asset Sale by a C Corporation 61 Asset Sale by an S Corporation 64 Asset Sale by a Sole Proprietorship or Single-Member LLC 65 Asset Sale by a Partnership or Multimember LLC 66 Allocation of the Purchase Price 66 5 Putting a Price on Your Business ere’s No Universal Pricing Formula: Many Factors Affect Price 76 Sales of Comparable Businesses 78 e Income Valuation Approach 79 e Asset-Based Approach 80 Industry Formulas and Rules of umb 82 How Appraisers and Other Experts Can Help You Set the Price 83 Putting It All Together to Price Your Business 84 [...]... business and his profits have grown, Joe has become increasingly disenchanted with the installation part of the business Not only can some customers be impossibly nitpicky, but the day-today hassles of installation take Joe away from his real love, drawing kitchen layout plans and building the fine custom cabinetry to fit them As a result, he decides to sell the installation part of the business to Lyle, a. .. for each of the next three years Lyle also agrees to pay a modest monthly rent to Joe for the office and shop space he’ll occupy As part of the deal, Lyle gets to take over (and earn money from) several installations currently in progress and ten that are about to begin Joe agrees that he’ll be available to consult with Lyle about any on-thejob design issues that arise Finally, the two agree that for... lot of value to offer a prospective buyer Hopefully, in analyzing your own business, you’ll be able to identify at least several attributes that will be of ­ articular interest p Factors That Make a Business Hard to Sell There are some businesses that for one reason or another are unlikely to be snapped up by a buyer Realistically, you can expect to have trouble finding any takers if your business. .. a general plan of action and then delegating one person—such as an outsider or nonowner CEO to carry it out Another solution is a buyout One contending faction can buy the other out and then prepare the business for sale to an outsider If the disagreements among the coowners or with an unrealistic heir of a deceased owner run so deep that you can’t even rationally and civilly discuss a realistic sales... electrical business that does electrical contracting and also runs a lighting store Maybe, with the help of a mediator, you can work out a deal where you keep the lighting store and the other owners keep the contracting business Then, you’ll be free to ­ pply your ideas to a Chapter 1  |  Deciding Whether—and when To Sell  |  17 build the profitability of the store, with the idea of selling it within the. .. when there’s a recession and midlevel managers are being laid off in droves, a number of these liberated ex-wage slaves—some of whom may even have received a generous severance package—may decide to abandon the job market entirely and either start or buy a business And when they do, they may even be attracted to a bad-luck (and possibly low-cost) business segment with good prospects to eventually rebound... right—from marketing and positioning your company in preparation for the sale to negotiating the best deal Each year, some 750,000 American businesses change ownership Most of these are small and ­ id-sized businesses: retail m stores, beauty salons, quick-print shops, restaurants, tax preparation services, landscapers, electrical contracting firms, and modest manufacturing operations to mention just a few... you have something to sell Fortunately, in many instances, there are steps you can take to make a borderline business saleable In later chapters ­especially Chapter 7) you’ll ( Chapter 1  |  Deciding Whether—and when To Sell  |  11 find practical suggestions for ­ oing this In d the meantime, here’s a list of factors that can help or hurt your chances of selling your business Factors That Make a Business Saleable... location that can be taken over by the buyer This is particularly important when ­ocation is essential l to the success of the business for example, a pharmacy that’s located close to a number of doctors’ offices, or a restaurant in the heart of your ­ town’s theater district If you’re leasing the space that your business occupies, you need to make sure the new owner can continue to use the space If so,... is primarily a f ­actor in selling a retail business and 12  |  The Complete Guide to Selling a Business not ­erribly significant if yours is a t service business • An exclusive distributorship that can be taken over by the buyer If your business has the ­ xclusive right to sell attractive e merchandise or services in a desirable area, the buyer will be protected from local competitors that otherwise . Forms on the CD-ROM 429 B Sample Sales Agreements Sample #1 Asset Sale of a Restaurant by One Sole Proprietor to Another 432 Sample #2 Entity Sale of a Bookstore by the Two Shareholders to an Individual. company in preparation for the sale to negotiating the best deal. Each year, some 750,000 American businesses change ownership. Most of these are small and mid-sized businesses: retail stores,. Buying a Business, Legal Guide for Starting and Running a Small Business, and The Employer’s Legal Handbook. His monthly column, The Legal Advisor,” is carried by trade publications around the