Editor’s note: This is the last in a five-part series.
Sadly, most real estate agents and brokers aren’t prepared for what can be the most important sale of their lives: the sale of their real estate business. Even if you locate a terrific buyer, there are a number of ways you can sabotage the success of your sale.
Your real estate business may not be as valuable as your house, but it may very well be your second most valuable asset if you position it properly. While you may believe that retirement is years away, you never know when there will be a family issue, spousal transfer, health, or other reasons for having to leave the business.
Planning now will not only result in you being prepared for a sale, it will also result in more income for many years to come. Once you locate the buyer, there are still several hurdles that you will face. Here are some of the pitfalls as well as what you can do to avoid them.
1. Entity or asset sale?
When you sell your real estate business, one of the most important decisions you will make will be whether you will be selling it as an entity sale or an asset sale. Each type of sale has both good and bad points. Before searching for a buyer, visit your accountant or tax attorney to determine what is required in each type of sale and which is best for you.
2. Will the sale be all money upfront or an installment sale?
This is a decision you must address with your accountant. If you receive all of your money upfront, 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?
Different assets have different sale requirements. For example, if you are selling a building, that will have different requirements as opposed to renegotiating a long-term sublease from your current landlord. Also, any fixtures, furniture or other types of equipment sales are often governed by a different set of statutes that may require a separate bill of sale.
You must also decide which business assets to 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 agreement. 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. How will a default be handled?
This is one of the most serious decisions that you will have to make. If you are doing an installment sale, consider participating in the transition and/or securing your debt against tangible assets such as the buyer’s house.
5. Internal Revenue Service 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.
If you are continuing to work, 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.
6. How will you transition your current client/agent database?
Whether you are an agent or a broker-owner, one of the most difficult issues in selling your business is how to notify your database of the change in your status. Many agents have found it useful to do a gradual transition. They take their soon-to-be buyer out on appointments and gradually ease their agents/clients into working with that person.
This approach has the benefit of seeing whether your agents and clients will be open to the change. On the other hand, announcing a change with no warning often results in a mass exodus.
7. Who will own the URLs and social media pages?
Your URL and your business page can be some of the most valuable parts of your business, especially if you have set them up using your geographical location or the specific market niches you serve. On the other hand, if you are still branding with your name, changing now to using lifestyle-based URLs and business pages will greatly enhance the value of your business when you decide to sell.
To protect your interests in an installment sale, encourage the buyer not to change the branding to use his or her name. Instead, keep it lifestyle and geographically based. Also, be sure that you provide for the transfer of the social media business pages and any related URLs back to you if there is a default.
8. Who is responsible for litigation after the sale?
This can be a very difficult issue to resolve. If there is pending litigation, generally the present owner is responsible. The most difficult issue to resolve occurs when there is a lawsuit filed after the sale based upon a transaction that took place prior to the sale.
The best way to handle these sticky wickets around the sale of your business is to anticipate as many issues as possible. Hammer out the solutions prior to the sale, have your attorney draft up the agreement, and make sure all parties have signed off. This is the best way to avoid hassles when you sell and to maximize the profits from your sale.