Your True Bottom Line: 4 Considerations
Sellers are sometimes surprised when they calculate the funds they will receive at the closing of their business transaction. Their surprise can become disappointment because they have failed to consider the following:
- The impact of a stock vs. asset sale – contract continuity may dictate a stock sale and sellers usually prefer a stock sale for tax and liability purposes. Buyers typically prefer an asset sale for similar reasons. Sellers should always consult a tax professional in advance of the transaction to protect their interests.
- The implications of corporate structure – “S” corporations, LLCs, and some partnerships generally eliminate the double taxation experience of a “C” corporation. If you are a “C” corporation and you are considering an exit a few years down the line, it is worth spending some time with a professional to plan for your future.
- “Holdback” provisions – a buyer may require a hold back of some percentage for the purchase price at closing to provide some extra security for issues not uncovered and resolved during the due diligence process. While these funds are typically placed in an escrow account with accruing interest, they may be inaccessible to the seller for up to a year or more after closing.
- Unique purchase contract specifications – a buyer may seek certain other provisions that reduce their risk, especially for short-term cash flow issues.
Whether or not this is the first time you have sold a business, take the time to create a mock closing summary, with all fees and proceeds itemized as best can be estimated. In addition, consider the tax and cash flow (personal) implications of the transaction. By doing so you will not only be prepared at closing, but you will also be better able to negotiate favorable contract language as the purchase agreement is being developed prior to closing.