Sale of a Privately Owned Business - The Best Possible Overall Transaction

Experience has shown that potential sellers are almost totally consumed and preoccupied with the Sales Price at which they want to sell their business. The problem with this tunnel vision is that while price is certainly important, it is just one of several key issues. For example, let's assume that your business is legitimately worth $1,000,000 and you are faced with the following suggested transactions:

1. $1,200,000 purchase price with $200,000 down, and you carry a Seller Note for $1,000,000, payable over the next 8 years with the business as the collateral for the note. There is an old adage that states, "The percentage of the purchase price that you finance is also the approximate percentage probability that you will not get paid." Thus, the high price loses its attractiveness due to the risk of the buyer defaulting. It should also be noted that the higher the amount of the note, historically, the greater the probability of future litigation.


2. $1,200,000 purchase price paid all in cash; however, the buyer wants the price allocation to be $200,000 for the business and $1,000,000 allocated to your salary of $250,000 a year for four years, as he requires you to stay and run the business. Understand that the $1,000,000 will be taxed as ordinary income at around 35%, and you also have to stay and run the place for four years. Have you really sold your business?


3. $1,200,000 with $500,000 down payment and a $700,000 note payable by buyer allocating 50% of future profits to note payments. Aside from tax considerations, you don't want to have the amounts of money paid to you determined by the buyer's determination of his profits. As you know a lot of decisions can make that 'profit' figure whatever a new owner wishes.


4. $1,200,000 all cash, but it is an asset sale involving your C Corporation. That results in double taxation (the corporation pays income tax, and then you personally pay tax on it when it comes to you) so that your net cash will be approximately $600,000.


5. $1,200,000 with $700,000 down and a $500,000 note with reasonable tax considerations; however, buyer has a history of litigation and refuses to agree to either time or dollar limits on possible claims, and he also refuses to sign legal documents that limit any claims against you to written documents provided in due diligence. Understand that you are not only entering into, but also creating a high risk situation as future litigation with a buyer usually means the note payments stop and your legal fees and time involvement in the litigation go ballistic. [For more information on this scenario, see our article about Worst Business Nightmare.]


6. $1,000,000 in cash, paid $950,000 at closing and $50,000 held in escrow for 60 days for a 'true-up' of any final details, then paid to you by the escrow agent, tax structuring that all monies paid to you over your basis come to you as long term capital gains, good legal documents and 60 days of time for you to train the new owner. If your basis is $200,000 then your Federal tax bill will be about $140,000, so your net cash will be about $860,000.

As you can see the Best Possible Overall Transaction issue includes price, minimal seller financing, good tax treatment, reasonable training/transition obligations, solid legal documents that minimize your exposure and full disclosure, in writing, of material facts to the buyer.