I Want to Sell My Business. Now What?
The sale of a business is significant transaction that should be carefully structured. Many Washington business owners have spent years acquiring business assets, developing good relationships with employees, suppliers, and customers, and creating a brand name that is positively perceived by the public. When it comes time to sell the culmination of years of hard work, there are many issues a prospective seller may consider.
At the outset, the seller of a business should consider how he or she wishes to structure the transaction. The sale of a business generally takes two forms: (1) the “asset sale”; and (2) the “entity sale.” Each form of transaction has potential benefits, disadvantages, and tax consequences. The savvy seller should consult with his or her accountant and an attorney in deciding what type of sale to pursue.
Business Asset Sale
An asset sale is a transaction where the business owner agrees to sell some or all of the business’ tangible and intangible assets to the buyer. Examples of tangible assets include furniture, fixtures, equipment, inventory, and real estate. Intangible assets include copyrights, patents, trademarks, accounts receivable, and goodwill. The manner in which purchase price is allocated to the assets included in the sale can have significant tax consequences.
In an asset sale, it may also be desirable for the buyer and seller to enter into a non-compete agreement, employment agreement, or consulting agreement. A non-compete agreement generally prohibits a seller from engaging in the same or similar business within a geographic area for a specific period of time. An employment contract may be required if the buyer desires to employ the seller to assist in running the business for a period of time following the sale. Similarly, a consulting agreement may govern the buyer and seller’s relationship if the buyer wishes to retain the seller as an independent consultant.
An entity sale is a transaction where the buyer purchases the seller’s shares of corporate stock or membership interest in a limited liability company. Generally speaking, the buyer steps in to the shoes of the seller in an entity sale. Unless otherwise agreed by the parties, the entity is transferred subject to existing contractual obligations and liabilities. An entity sale may require the seller to provide the buyer with access to the business office, records, files, books of account and tax records to conduct an investigation of the company’s financial condition. An entity sale is treated differently than a business asset sale for tax purposes. A prospective buyer and seller should consult with their accountant to fully understand possible tax consequences of an entity sale.
Like an asset sale, an entity sale may involve additional agreements between the buyer and seller such as non-compete agreements, employment agreements, and consulting agreements. It is often desirable for the buyer or seller of a business to retain an experienced business attorney to help with every stage of the process, including preliminary negotiations, to ensure the buyer or seller’s interests are protected.
Buying or selling a business is a complicated process. If you have questions concerning the sale of a business, a Spokane business attorney can help. Wolff, Hislop & Crockett prides itself on being a trusted legal resource for businesses in the Spokane, Spokane Valley, and Liberty Lake areas and beyond. Contact us today for a consultation.