Accounting for Transition
Once you’ve decided to sell your company, there’s still a lot of work to do before you can put it on the market. The first step is to put together your transition team and plan.
Next, you’re likely to speak with your appraiser about the process for valuing your business. To get an accurate result, the appraiser will need to examine your books, facilities, equipment, personnel, pending legal issues, and so forth. As it happens, this is nearly identical to the due diligence process that buyers will go through as they prepare to make you an offer. Getting your books in order at this early stage will be entirely to your advantage throughout the sale process.
As you structure the deal, one key question will be whether you are selling your business as a tangible asset or in the form of equity, or stocks. Experts say that deals tend to have a stronger emotional component when you are selling an asset as opposed to stocks. There are pros and cons to both approaches. In most cases, the driver of this decision will be taxes. That’s because IRS regulations provide different ways to treat these two types of transactions.
Because there are so many variables involved, buyers are often skeptical that the business will continue to perform as expected after the transition. To overcome this risk factor, many deal structures include provisions called “earn outs” and “contingent payments.” Basically, these mean that part of the purchase price is held back, contingent upon the business earning at a level that justifies the full selling price.