(This is Part 6 of a six-part series. See Part 1: Are your ready to sell your real estate practice? Part 2: Finding best successor for your real estate biz; Part 3: How to build a saleable real estate biz; Part 4: 7 ways to beef up your real estate business and Part 5: Putting a price tag on your real estate business.)
If you’re thinking about selling your business, lack of careful planning can cost you thousands of dollars.
The last five columns have examined how to build your book of business and how to establish the value of your business. This week’s edition looks at how to navigate through the actual sale.
First, the most important step you can take is to talk to both your attorney and your CPA before doing anything. Issues you will have to address include the following.
1. Entity or Asset Sale?
An entity sale transfers all stock in the company and/or all membership interests in an LLC. The sale is subject to long-term capital gain tax. In contrast, asset sales divide assets into one of seven categories. Some of these categories are taxed at the long terms capital gains rate and others are taxed as ordinary income. By planning and setting up the appropriate type of transfer, you can minimize the amount of tax that you will pay.
2. Do you want all of your money up front or will you use an installment sale?
This is a decision you must address with your CPA. If you receive all of your money up front, it’s usually best to take a deposit while you are still working and then take the balance in the year where you are not working. If you are doing an installment sale, you must take steps to protect yourself while you are waiting for your buyer to repay you. For example, how will you handle a default? What type of security will you take from the buyer to protect the value of your business when you are no longer running it? Should your sales contract include a “first right of refusal” that allows you to take the business back if your buyer gets into trouble?
3. What are the logistics of the transfer?
Which, if any, business assets will you keep? For example, if you have branding using your name, are you willing to release it? If you are doing an installment sale, are you willing to work in the business to make the transition go more easily? If so, how long are you willing to work and who will be the boss – you or your buyer? Another important issue to consider is whether you will have to sign a non-compete. If your buyer ruins the business and you have a non-compete in place, you may not be able to step back into the business to recoup the money the buyer still owes you. Clearly, it is imperative to have an attorney draw up the sale agreement.
4. IRS requirements
In addition to these issues, the IRS requires both you and your buyer to complete IRS Form 8594, the Asset Acquisition Statement. This is filed with your tax return. Other financial forms include a bill of sale for tangible assets and the consent of any entity owners for the sale of those assets. For example, if you own a moving truck where there is a principal balance, you will have to make arrangements with the lien holder to do the transfer. If you are staying on, you will have to declare your relationship to your purchaser either as an independent contractor or as an employee. You will also want a promissory note to secure the sale if the buyer is purchasing using an installment sale. Additional forms include a security agreement and a UCC (Uniform Commercial Code) financing statement. For installment sales, purchase insurance certificates for assets and a life insurance policy for the buyer that names you as the beneficiary.
Pitfalls to Avoid
1. What’s the buyer’s work ethic?
Does this person have the commitment required to run your business? If the person’s work ethic does not match yours, your business and the profit from your sale may both disappear.
2. Know your buyer
Even if you have worked with your buyer in the past, run a credit check and background check. A poor credit history means the buyer may not pay you either.
3. Is this person a culture match for your client base?
Before selling your business, take your buyer on listing appointments. Introduce him or her to the people in your referral database. Actively solicit their opinions to determine if there is a fit. If not, don’t sell because your present clients won’t deal with your buyer and you’ll be doing a disservice to all involved.
4. Don’t let the buyer change the brand to their name.
If your buyer brands your business with their name, it’s virtually impossible to reclaim the business. Instead, require the purchaser to brand the business using the geographical location and the niches served.
5. Protect your staff and your past clients.
Build in safeguards if any of your staff is staying on after the sale. This gives your client list consistency and makes for a smooth transition.
How well you plan today will determine how much you can net from your business. Are you ready to close the most important deal of your career?
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