Business Sale Negotiation
Every successful business receives offers to sell to franchisers, buy back their franchises, or negotiate transfers. Businesses are sold by realtor-brokers or trade association listings. Sometimes the competition or retired people try a hand at acquiring your business or the competition wants to expand their empire. I have personally had offers many times to either buy other practices or sell mine.
The best business solution is to continue the business by turning it over to their family, presumably family members who are active in the business Corporate stock transfers or sales should be done gradually and with the direction of a competent business attorney and Enrolled Agent to avoid capital gains or estate taxes, Sometimes there no heir apparent and a cold sale is offered, Losing businesses which are sold winning businesses portray doom far the buyer, who is probably paying on a note for the purchase, and the seller who will never get all the money, A typical purchase involves a down payment and a five-year note. The price is based on physical assets and profitability. A bad deal for either the seller or buyer results in a two-way bad deal, so it pays to be honest about expectations and cash flow. Good financial statements and matching tax returns are always useful. Lawyers and business sates go hand in hand. That is when you find out if your lawyer is a winner or loser.
We assisted a franchise owner who had an offer from the major franchiser. The lady had burned out over the years while building a successful franchise, It was professionally presented with an array of charts, graphs, and data to apply to their first and final best offer. We told her to ask for $25 grand more. She fought us because it was a final offer. "Never accept a first offers" we advised and she finally countered. They accepted and she was happy all the way to the bank. In the business world, as with real estate, never take the first offer, ever.
The Wall Street Journal is full of national franchises for sale. unfortunately, they do not guarantee success, even though the sellers take your down payment and secure SBA loans. Å recent cash purchase of a small restaurant franchise resulted in a client losing his considerable life savings in a deal that was "guaranteed to succeed," according to the franchisor, Hardly two years later, with hardly enough customers: the business shut down. Because the client had not filed his corporate tax returns, the State sent out bills showing income tax on all the income [from sales tax reports] without allowing any expenses. That is an old and true California Franchise Tax Board method of getting non-filer's attention. The bill, which included many penalties and interest on all, was so big that it recently hit their publicized list of largest big bad tax debtors. If the owner had filed the returns, which showed losses, he would have owed no corporate taxes whatsoever.
A client who had a small trucking business, received an offer from a major transportation firm. We met in my conference room and were outnumbered by the white shirts. The client had their offer in hand when we started but when we left there was a much better offer accepted. Sadly, a year later all of the business had been wasted away by the impersonal big business.
Sometimes clients will sell a business, move out of the territory, and return later. This happened to a client who sold a small successful construction company. When he returned over a family matter a year later the new owner couldn't handle the business and willingly sold it back to the old owner.
A corporation can be taken over by a new owner who will simply buy the outstanding stock and become the new president. In that case, the corporation is intact and the seller usually has a capital gain or loss tax problem. In one case, there were undisclosed very large tax liabilities which didn't become apparent until a routine sales tax audit was conducted years afterward. The new owner was on the hook for the taxes since they were a corporate liability. It took the client years to pay them off while the prior owner went Scott-free [nobody could find him].
An elderly client received an unsolicited offer [directly without a realtor involved] for a mobile home park she had owned for many years. It was a huge offer by housing tract builders who had plans for her big lot. We told her to counter offer and even typed out the counteroffer for her. They accepted and she was a quarter-million richer afterward.
A client asked us to help sell a land-locked piece of fallow farm property. Another client showed an interest. We are not realtors and put that in writing to the client for what should been a simple straightforward deal. We even hired a professional [due diligence is always important] to research the land to show everybody where the earthquake fault lay, so there were no questions unanswered. The thing was completely landlocked and the developer would need to put in all the County street and utility improvements. The widow had an unsociable son who was not financially inclined and spent his time walking the farm in cowboy boots with a six-shooter on his belt. The transaction was ready for signature when an exiled daughter arrived from Las Vegas and spooked the deal, resulting in no sale. Her mother died the next year and instead of income from the land, they faced an estate fire sale.
Business sales are complicated. A good sale has an honest buyer and seller because they are both tied together. A bad party on either side brakes a deal even after it is made. Always seek competent advice on these matters.
I get great satisfaction from advising my clients over the years, especially the people who listen, and years later finding them still in business. Business is inherently risky, and the waves of economic booms bring profits that can easily disappear in recessions or other tragedies. Being a real entrepreneur can be rewarding, while there is no guarantee of success.
* Phillip B Chute is an Enrolled Agent, tested, licensed, and appointed by the IRS directly. He has prepared or supervised over 25,000 tax returns over 30 years.