The Unexpected Costs Of Selling Your Business

Most business owners only sell one business in their lifetime, and many aren’t aware of the costs associated with a business sale.

Anticipating these costs in advance prevents unwanted surprises and allows you to collaborate with your deal team advisors on ways to financially structure your sale, estimate taxes and project the money you can put in your pocket, after the sale.

The amount of money you keep after selling your business is affected by several factors, such as:

• Loans: Upon closing the sale of your business any loans made to your business will need to be paid including any prepayment penalty fees. Be sure to check with your lender to find out if you will have prepayment penalty clauses connected with early payment of your loans.
   
• Transfer fees:
  • If you own a franchise or your business is a distributor of a brand product, your agreement with them may provide for a transfer fee. These fees cover their cost associated with evaluating the buyer’s fit and preparing the necessary documents to accommodate the transfer.
  • If your business leases real estate make sure to carefully review your lease to look for any clause that includes the landlord’s ability to be paid a fixed amount to transfer the lease, or in some cases a percentage of the business sale.
     
• Deal Team expenses:
  • An Attorney with your best interests in mind will help prepare the definitive agreement detailing the final terms of your sale. Most business transaction attorney fees are hourly and total amounts vary and may range from $5,000 to $500,000 depending on the size of your business sale and the complexity of the transaction. Buyers and Sellers will each pay the expense of their own attorneys.
  • An Accountant to advise ways minimize taxes and calculate the taxes you will need to pay. You may also need your Accountant to prepare your financial statements for the Buyer’s deal team to examine during the due diligence process.
  • A Business Broker to confidentially package and market your business to buyers. Fee’s generally ranges from 3% to 10%, depending on the size of your business.
  • A Financial Advisor to guide you through investing and designing a plan for leveraging your proceeds into the future.
     
• Income tax: The sale of a business usually triggers a long-term capital gain for the seller, resulting in a federal capital gains tax. State taxes may also apply.
   
• Deal financing: Very few deals are full cash at closing. Usually, financing is a mix of cash at closing and alternate forms of payment. As a Seller you may need to negotiate terms for a partial loan to the Buyer. There are two common types of Seller financing that take place in most business sales:
  • You might be asked to carry-back a percentage of the sale, agreeing to payments over time. If the Buyer is getting an SBA loan to purchase your business, you may be asked to carry-back around 10% of the sales price for a few years. You will be earning interest on the amount you are waiting to be paid, however that money will not be in your pocket – it will be used to help the Buyer finance the sale.
  • Or Seller financing can be in the form of earn-out, a series of conditional payments made over time and based on agreed upon performance targets. If your business has key customer relationships that are dependent on you and a Buyer is concerned about future revenues from those customers after a sale, they may ask you to wait on a portion of the sale price, to ensure these future sales will happen without you.
     
• Crediting the Buyer for:
  • Prepaid sales.
  • Accounts payable for items that will not be left in the business.
  • Gift cards that have not been redeemed.
  • Payroll and bonuses or commissions that have been earned but not paid.

Don’t wait too late to discover how much money will go in your pocket when you walk away from the closing table. Go to mySellerInsights.com to learn more about how you can prepare yourself and your business to maximize your sale proceeds. Seller Insights videos and activities educate business owners on the dynamics that affect deal proceeds, giving you the time and space to explore what a win-win deal means to your unique situation.