Business Purchase and Sale 101
People generally think the sale of a business involves some interest, some bargaining, and then the payout. However, the process is substantially more complex than at first glance. The process involves a significant amount of thought, planning, modeling, and projecting. If you are individual rather than a family, there may be a little less, but nonetheless, the purchase and sale of a business is a decision that if not done wisely and with prudence can haunt you for a lifetime.
DISCUSS
Discuss the purchase and sale with your family. Having children, spouse, or significant other can greatly affect the purchase and sale. Why are you purchasing, what are you purchasing, how does it affect your life with them?
Why are you selling? Freeing up time? Cashing out your investment? Retiring? There is no right or wrong answer so long as the decision works out well for you.
HOW MUCH DO I ASK FOR?
This has a few moving parts and is contingent on several issues or even more.
Generally a sale price is determined by 3-5 years of profits. However, there is more.
Are there any assets in the business?
Existing deposits, leases, good will are all worth something as well. Though it is generally difficult to put a dollar amount on sweat equity, this is when the time comes to do it.
Relationships, networks, resources. It may make sense for you to stay on as a consultant or employee.
How much money do you need now if you selling? Are you only trying recoup your initial investment? It may help to defer some money with interest. This especially holds true if the buyer does not have adequate upfront cash.
All of these factors plus whatever works for you should go into this decision.
HOW WOULD YOU LIKE YOUR MONEY?
The question of the hour is “How do you get paid?” This really depends on your needs. Do you need the proceeds immediately? Do you mind earning some interest and accepting payments over time? Would you prefer a lump sum payment in the beginning or sometime in the future?
THE FUTURE
While it may be ambiguous, you have a lot of options. What you do with your free time is up to you. However I early mentioned that you could stay on as a consultant or employee. Another option is maybe the buyer wants a non-compete to keep you out of the field. Thought courts generally do not like non-competes. Non-competes when the business is sold and the seller receives adequate consideration are generally uphold. The next question is, what is a fair price for this service?
NOW WHAT?
PURCHASE: Get to work! You probably already have a business plan in place. If not, you should complete one immediately. Its more than likely you’ve already put in a significant amount of time into this process. Now, the sweat equity begins to build.
SALE: What do you do with the newly found freedom and not to mention proceeds of the sale. One option is to remain on with the business and consult and help the new owner learn the ropes. I’m not suggesting you work for free. You should be compensated for your time and knowledge. No body knows your business better than you.
For more information on the purchase and sale of businesses, contact Patrick W. Kwan at Rhodes Legal Group, PLLC patrick@rhodeslegalgroup.com
