Volume 4 Issue 6

Nov/Dec 2000

© by Newland & Associates

Often, selling something of value, such as a car or a house, is not a simple task. In this issue, we will focus on some of the matters you need to consider when selling another possession of value -- your business.

After making the initial decision to sell the business, one of the next decisions is whether to use a Broker. Most business Brokers ask for a commission of 10% and do not get paid unless they produce a Buyer and there is a closing. You may want to make some inquiries on your own before listing with a Broker to see if any of your competitors are interested in buying your business.

Using a Broker

If you decide to retain a Broker, the Brokerage Agreement (the contract between Seller and Broker) must be considered. As with any contract, a Brokerage contract can be changed or amended. Let’s say you have spoken with several local competitors who may be interested in buying your business, but they have not responded yet. Can those leads you generated be excluded from the Brokerage Agreement should the competitors decide to buy? Of course, but appropriate language must be included in the Agreement.

Most Brokers prefer to have an exclusive contract for as long as possible. Such a Brokerage Agreement would provide the Broker a commission if any Buyer (even one contacted before the Agreement was signed) decided to buy.

Aside from exclusivity, the duration of the Brokerage Agreement is also important. Fairness dictates that the Broker have adequate time to implement the listing and show your business to would-be Buyers. On the other hand, if the Broker is not providing the desired result, after a reasonable time, you should have the right to terminate the Brokerage Agreement.

Whether or not a Broker is retained, if you are going to sell your business, you need to do some planning prior to listing it for sale. Some of the "what-ifs" to consider are:

• What if the Buyer doesn’t want all of the business assets? For example, the Buyer already has state-of-the-art printing presses and doesn’t want your old junk.

• What if the Buyer wants you to remain as an employee for a fixed period of time and pay you a large salary which might be tax deductible to the Buyer and ordinary income to you? You must decide, "Do I want to stay? How long? At what price?"

• Reducing the purchase price of a business, in consideration for a salary arrangement with the Seller, can lead to tax and legal issues which could cause problems for the Buyer. "So, who cares," you say, "I’m the Seller." While it is true that if there is a tax audit the adverse consequences will usually be visited upon the Buyer, such a controversy may draw the Seller into the morass as a witness.

• What if the Buyer wants you to agree to a covenant (promise) not to compete? It would be unfair to the Buyer if the Seller took the sale proceeds and started a new competing business across the street. So you should anticipate being asked to agree to non-compete restrictions that favor the Buyer. If so, for how long should you agree not to compete?

• What if the Buyer says, "It would certainly help me if you could provide Seller financing and let me pay you over, say, five years?" There is nothing wrong with Seller financing but many important factors are involved, not the least of which is, what if the Buyer defaults?

• What if the Buyer asks for warranties that information you have provided about the business is correct, or that a key piece of equipment will work properly for one year from the date of purchase?

Since lawyers, such as myself, are good at "what ifs," this list could go on ad nauseam. My intent here, however, is to raise just a few of the many questions that need to be addressed by a business Seller.

Over the past 20 years I have assembled a Checklist for Business Purchases or Sales which covers many of the areas you need to consider in buying or selling a business. Just call our offices or visit our Web site, www.tax-business.com, to obtain a free copy. If that doesn’t answer your questions, then call us.

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Published by the law firm of Newland & Associates, P.L.C. For a full range of business law and tax-related services, call us at (703) 330-0000. You may also e-mail us at , or visit our web site at http://www.tax-business.com.

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