Handbook / Hiring and growth

How to sell a small business: valuation, buyers, agreement and tax forms

Selling a small business can be the reward for years of work, but many owners find their business is hard to sell because it depends too heavily on them, or because records are incomplete. Planning early makes a sale more likely and can improve the price. This guide covers the main steps. It is general information, not legal or tax advice.

Start preparing early

Buyers pay for a business that can continue without the seller. Long before you sell:

• keep clean, complete bookkeeping and tax records
• separate personal and business finances
• document processes, so others can follow them
• put key client relationships and supplier terms in writing
• reduce dependence on yourself by training staff or subcontractors
• build predictable income, such as recurring revenue or a productized service

Decide what you are selling

The structure of the sale matters:

• asset sale: the buyer purchases assets, such as equipment, inventory, customer lists, brand, website and goodwill. This is the usual route for sole proprietorships.
• entity or stock sale: the buyer purchases ownership of an LLC or corporation, which can include its liabilities. For LLCs, check your operating agreement for rules on transfers.

Each has legal and tax consequences, so get advice before agreeing a structure.

Value the business

The SBA recommends using a business valuation to set a value before marketing to buyers. It says to value all property and real estate tied to the business, including intangible assets such as brand presence, intellectual property, customer information and projected future revenue. It describes three common valuation methods:

• income approach: looks at projected revenue and accounts for potential risks
• market approach: compares your business with similar businesses that have recently sold
• assets approach: subtracts total business liabilities from the total value of all assets

The SBA also suggests getting advice from your lawyer and a business valuation expert, along with other professionals such as accountants.

Find buyers

Potential buyers include:

• competitors or businesses in related fields
• employees or contractors who know the business
• customers or suppliers
• people in your network looking to buy a business
• buyers found through a business broker or marketplace

Use a confidentiality agreement before sharing detailed financial or customer information. See NDA for freelancers.

Negotiate and draft the agreement

The SBA says you must prepare a sales agreement to sell your business officially, and that an attorney should review it. The agreement should list the assets in the sale, the names of the seller, buyer and business, how the business will be run before closing, the buyer's access to information, and adjustments and broker fees. The SBA warns that leaving out assets or liabilities can create problems.

Other common terms include price and payment schedule, any seller financing, a transition period where you help the buyer, and restrictions on competing.

Tax forms and planning

The IRS explains that both the seller and the purchaser of a group of assets that makes up a trade or business must use Form 8594 to report the sale if goodwill or going concern value attaches, or could attach, to those assets and the buyer's basis is determined only by the amount paid. The form reports how the price is allocated among asset classes. IRS Publication 544 explains how sales and other dispositions of assets are treated. Because allocation affects the tax both sides pay, agree it carefully with professional advice.

Transition

Plan the handover:

• introduce the buyer to key clients and suppliers
• transfer accounts, domains and software
• hand over documentation and passwords securely
• agree the length of your support period

Close what you no longer need

After the sale, close or transfer anything remaining in your name. The SBA's closing steps include filing dissolution documents for entities you no longer need and cancelling registrations, permits, licenses and business names. Keep records of the sale for the periods in how long to keep records.

Timing the sale

Sell from strength where possible, when results are good and you have time to prepare.

Prepare years ahead with clean records and a business that runs without you, get a valuation, choose an asset or entity sale with advice, protect information, use an attorney-reviewed sales agreement, file Form 8594 where required and close what you no longer need.