Charles S. Wilson, CPA/CFF, CGMA, CBEC | CERTIFIED BUSINESS EXIT CONSULTANT | 281-993-4530 | charlie@wilsonaccounting.net
         

Exiting Your Business vs. Selling Your Home

 

[fname], many business owners believe that exiting their business is a process that they can handle themselves, or 'deal with' when the time comes. All too often, those business owners lose a lot of their hard-earned wealth when they do not understand the issues involved with a Business Exit and, consequently, do not do enough advanced planning.

Because so many business owners mistakenly believe that selling a business is akin to selling a residential home, I will explain the differences between selling a business versus selling a home or, for that matter, how selling a business differs from the sale of virtually any other asset that you will sell in your lifetime. These comparisons become very significant because, generally, a private-held business is that business owners' largest and most valuable asset.

Issue #1 - Valuation
Home sale values are not a 'range concept' but rather they are based on the comparable sales method for neighboring homes that resemble the house being sold. More importantly, the Value of a home is not dependent upon who the Buyer is. In the world of residential real estate, all buyers are (essentially) equal they are either qualified for financing or they are not. In the world of business sales, the type of Buyer that you are talking to is critically important.

 

Different buyers bring different attributes to the business sale some will pay more than others, and some will have to pay you out over time. This is not the case in the sale of a home. But, in the sale of a business, value and the stream of payments varies from buyer to buyer (for example, a competitor will pay more for your business than an employee who needs to pay you from cash flow from the business). This leads us to issue #2.

Issue #2 Deal Structuring
When a homeowner sells their home, they get paid the negotiated selling price at the 'Closing'. In Business Exits, the amount of money received at Closing often times represents only a portion of the total proceeds that are part of a larger negotiated selling price (there is a general rule that smaller deals less than $3 million - are subject to more 'structuring' of payments, while larger deals get more 'cash at closing').

 

Included in the Deal Structuring are Deferred Payments, Contingent Payments, Non-Compete Payments, Consulting Agreements, Escrow Payments, and continued lease and property rental payments. Complicating Deal Structuring even further is the fact that each of these payments is subject to its own tax rate. Also, as a general rule, Buyers prefer to purchase Assets (of a Company), while Sellers prefer to sell stock. Again, this varies significantly from the sale of a home.

Issue #3 Taxes
When you sell a Home, there is (generally) one (1) tax rate. When you Exit a Business, there are an endless number of potential tax outcomes for the transaction. The most easily recognized tax rate is the rate applicable to the sale of stock - the Capital Gains Tax rate. This rate applies to the gain - the amount of Value exceeding the cost basis of the stock that is realized in the sale of shares of the Company.

 

Payments to an exiting business owner can be characterized as Goodwill, Personal Goodwill, Income, or, alternatively, fall into an Internal Revenue Code section deferring the taxation until a future date, such as IRC sec.1042 for (certain) sales of shares of a C Corporation to an Employee Stock Ownership Plan ESOP. The sale of a residential Home does not afford the Buyer and the Seller options for reaching such characterizations, or deferments, of the taxes.

Issue #4 Transaction Types
The sale of a residential home includes all of the property and the structure(s) that are on that property. Therefore, residential Home Sales are an 'all or nothing' deal. Business Exit Strategies are limited only to one's awareness and imagination. You can sell a portion or all of your Company stock (or assets) as part of an Exit many business owners do not know this.

 

Once this concept is grasped, an owner's primary motives for the exit may be more easily achieved. In other words, different types of transactions are available to allow flexibility to the process of business owner exit strategies.

Issue #5 Service Providers
The sale of a residential home generally includes the services of a real estate broker. A brokers' responsibility is to know local markets (for Value purposes), and to attract buyers to the 'listed' property (often through an 'open house' format).

 

Alternatively, exiting a business includes the services of a professional who can draft documents reflecting the agreement for the transfer of shares (or assets) of the privately-held company (an attorney), document any arrangements for future payments and security that is taken in lieu of payment at the closing (again, an attorney), assess the taxes that must be paid as a result of the transaction (normally done in advance of a closing by an accountant), and understand the unique nature of your privately-held business (transactional intermediary).

A transactional intermediary should have experience:
> presenting the business in a light most favorable to the exiting business owner,


> locate potential buyers amongst a sea of investors,
 

> collect, maintain, and enforce (if necessary) confidentiality agreements - you don't 'open house' the Sale of a Privately-held business,


> negotiate with potential buyers in a language that they understand, i.e. communicate the added value that your company affords the buyer from a return on investment perspective, and


> coordinate all of the service providers that are required to close on the deal.

In short, residential home sales are commonplace, whereas sales of privately-held business require experience and a very delicate touch.

Having read this you should be convinced that exiting a business is different that selling a home. Many of the complexities of business exits can be mitigated by raising your awareness of the difficulties involved. Therefore, we say that a pro-active approach to an exit strategy is the only approach to a successful exit strategy.

 

As always if you need some advice, you're welcome to email me of call me here at the office at 281-993-4530.

 

Regards, Charlie

 

Charles Wilson, CPA/CFF, CGMA, CBEC

Charles Wilson, LLC

307 S. Friendswood Dr, Ste B-2
Friendswood, TX 77546
281-993-4530 (O)
866-567-3975 (F)
charlie@wilsonaccounting.net



 



 


   
 
         
   
         

         

Charles Wilson, CPA/CFF, CGMA, CBEC is a Certified Business Exit Consultant and is affiliated with Pinnacle Equity Solutions, Inc., an Exit Strategies Training and Solutions company.  Parts of the content in this email are taken from previous Pinnacle Equity Solutions, Inc's. newsletter library and website in accordance with Charles Wilson's certification in Pinnacle's Certification and Membership Program. All Copyrights are the properties of Pinnacle Equity Solutions, Inc. and Charles Wilson, LLC and their respective owners.