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Selling A Business

Should You Close Or Sell Your Business?

posted by mpactventures
May 17, 2019 1268 0 0
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Article Summary of Why Now Is The Best Time To Sell Your Business:

  • How To Close A Business in Texas
  • How To File for Bankruptcy or Liquidate
  • Tips For Selling Your Business

Why Now Is The Best Time To Sell Your Business

The decision to close or sell your business is a difficult one.  However difficult, it’s a decision that roughly 9 million business owners will be making over the next decade.  This is because 60% of the 15 million privately held businesses in the U.S. are owned by owners born before 1964.

Some businesses are prepared for this transition.  They’ve planned out their succession plans, whether it’s to give to a family member or a valued employee.

Unfortunately, according to USAToday, 58% don’t have a succession plan.

“On the supply side, we have about 60 percent of the 15 million privately held businesses in the U.S. are owned by business owners born before 1964,” says Christopher Nicholas, Shields & Co., at ACG Boston’s DealSource Select.

The main reason, according to the article, is that Boomers enjoy running & managing their business.  This is a big mistake that many boomers make when owning a business: they become the ‘Superhero’ of their own business – thus making the ability to sell their business extremely difficult.

If you’re one of those who doesn’t have a succession plan, you will ultimately have to answer the difficult question of whether you want to close or sell your business.

How To Close A Business in Texas

Since I’m a South Texas guy, I’ll speak about specifics regarding closing a business in this great state.

The benefits of closing a business include the fact it’s cheaper, simpler, and easier than insolvency.  Plus, you can do most of the forms yourself.

The disadvantages of simply closing a business include serious tax implications (depending on how you extract funds from your company), charges from creditors, and, should you change your mind, having to go thru the whole startup process from scratch.

If you’re looking to go down this road, don’t do it alone.  Get professional guidance – seek advice from your attorney, a business evaluation expert, your accountants, banker, and the IRS.

Here are the steps to closing your business in Texas.

  1. Decide to close. Sole proprietors can decide on their own, but any type of partnership requires the co-owners to agree. Follow your articles of organization and document with a written agreement.
  2. File dissolution documents. Failure to legally dissolve an LLC or corporation with any state you’re registered in will expose you to continued taxes and filing requirements.
  3. Cancel registrations, permits, licenses, and business names. Protect your finances and reputation by canceling any of these that you no longer need, including your trade name.
  4. Comply with employment and labor laws. Reference the Worker Adjustment and Retraining Notification Act (WARN) for employee payment after closing, along with other federal and state laws.
  5. Resolve financial obligations. Handle final returns for income tax and sales tax. Cancel your Employer Identification Number, notify federal and state tax agencies, and follow this IRS checklist.
  6. Maintain records. You may be legally required to maintain tax and employment records, among other files. Common guidelines advise keeping records for anywhere from three to seven years.

How To File for Bankruptcy or Liquidate

If the disadvantages of simply closing a business are great, then you may want to look at bankruptcy (after consulting with professionals). Only look at this option after you’ve exhausted others (like selling, merging, etc…)

This process of liquidating assets to creditors and shareholders will require a sound plan of action.

Again, before deciding to terminate your lease, downsize your employees, sell off your equipment, disconnect all utilities, etc…, talk to your lawyer and accountant. They’ll help you develop a plan to present to creditors, whose cooperation you will certainly need during this process.

Here are 8 steps in the asset liquidation process in Texas:

  1. Prepare an inventory and determine assets for sale
  2. Secure your merchandise
  3. Set liquidation value of assets with a qualified appraiser
  4. Use that value to estimate net sale proceeds and re-evaluate your decision
  5. Choose sale type: negotiated, consignment, internet, sealed bid, or retail
  6. Select the best time and location for your sale
  7. Hire an auctioneer, dealer, broker, or other experts to conduct
  8. Use a non-recourse bill of sale so buyer accepts the associated risk

Tips For Selling Your Business

If given an option between simply closing the doors, filing for bankruptcy, or selling a business, most business owners would prefer to sell their business.  The process of selling can be quicker and easier than you think.

When selling, you have the option of selling to a family member, selling to an employee (though if those two options were available, you wouldn’t be reading this), using an online business broker, or selling to an experienced business buyer.

The pros of using a business broker are that they have the experience, understand how to evaluate & determine price, and know how to negotiate.

While using a sales broker when selling your business may seem like a simple & logical solution, but the reality about using these brokerage sites is this:

90% of businesses put on the market don’t sell.

The biggest reason I’ve found that brokers’ don’t work well is that they set an unrealistic expectation of your company’s value.  This is because the broker, who works off a commission (typically 10% of your proceeds) and has their own best interests at heart, not yours.  Because of this fee structure, they’re motivated to get a large, upfront sale rather than other alternatives that may work better for you in the long run.

Also, in reality, many of the brokers aren’t very good at what they do and that you, as a savvy business owner, can sell a business better by yourself.

Perhaps the 2 biggest reasons to sell to an experienced business buyer directly:

  • Creativity in offer
  • Experienced in growing businesses

To reiterate: if using a broker, a broker is going to create a deal that yields the broker the best commission – regardless of whether or not it’s in your best interests.  Typically, this means trying to sell the business for the highest up-front cost to maximize commissions.

However, a high sales price may make it difficult to sell (a big reason why 90% of businesses don’t sell thru brokers) and may, in the long term, be detrimental for the company & employees.

Also, a one-time lump sum payment may not be in your best interest either.  Some small business owners may actually want to sell their business as a way to fund their retirement, and a high front end may not be as attractive to you as installment payments.

If you’re looking for more options when it comes to selling your business, then working with an experienced business buyer in Texas may provide you with your best results.

How To Sell Your Business

The process of selling a business isn’t that complicated.  In reality, there are pretty much 2 simple steps to follow:

  1. Make an agreement
  2. Transfer ownership

What needs to be in an agreement?

A purchase agreement is the written contract detailing all of the relevant terms of the business sale. You’ll probably have other documentation involved, like a bill of sale, a promissory note for financing, stock transfer certificates, etc… but this agreement is your explanation for the entire transaction.  Basic items to include in the purchase agreement are the type of sale (asset or entity), the purchase price, each party’s obligations prior to closing, and of course, the actual closing date.

Tips on transferring ownership:

how to transfer ownership of a business
Source: SBA

While you can put these together yourself, it’s a good idea to involve professionals to finalize the agreements.

Summary Of Close or Sell Your Business

Some 9 million Boomer business owners will have to make a tough decision in the coming decade of whether or not they want to close or sell their business.  While closing the business may be the quickest & simplest solution, there can be tax & legal implications.  Selling the existing business is typically a more ideal situation because you can establish a legacy and earn much more revenue from the sale (either up front or thru deferral payments) to enjoy in your golden years.

Have questions or comments regarding the decision of whether it’s better closing or selling a business?  Leave them below!

Have any questions or comments about Should You Close Or Sell Your Business? Please contact me!

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About MPact Ventures

michael palomo | Mpact Ventures
Michael Palomo, the founder of MPact Ventures in McAllen, Texas, is an investor who focuses on solving the tough problems facing business owners, such as improving cash flow and becoming more efficient & cost effective, so they are successfully able to grow their business, get off the ‘cash flow rollercoaster’ and create a more stable way of life for themselves and their loved ones.

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