Selling or Buying a Small Business/Selling business

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QUESTION: I have been running a small business for about 10 years. The owner has 100% stock. He would like to get me the business due to his age but I do not have the money to purchase it outright. How can this be done legally. He was thinking a life insurance policy that would somehow pay insurance money to the company and then it would somehow transfer the stock to me. Is this possible and what would the jssues be for us.

Or do you have a better option.

ANSWER: Hi Chris and thank you for your question.

There are many ways to transfer a business to another owner, but regarding a life insurance company I am not sure. That I believe would be a question for an insurance broker as I imagine they have rules regarding those things.

If money is an issue, than there are a few ways you can approach it. First, the most obvious is a business loan. You can go with a bank or an SBA loan, which is simply a loan guaranteed by the Small Business Administration. The downside to this is that it can require a lot of paperwork, a long time, and make you put up collateral for the loan. This can be a tough way of doing it but it works fine, depending on the type of business, assets of the business, and income.

Another way to do it is a seller carried note. The seller (owner) carries the loan; loans you the money to buy the business and you make payments to him over time. These can be arranged however you and he agree to - you make a down payment and then make payments for 5 years with a balloon payment at the end, or however it makes sense for the two of you.

Or, you can do a combination of two types of financing, with some of the balance coming from a bank and some from the seller. This usually works well because the bank has less risk if they are only loaning part of the total purchase price. But your seller must be okay with being in 2nd position for his loan to you (behind the bank loan).

Or, you can do an earn-out, which basically is where the owner retains ownership for a time while you work and build the business, and over a period of years you gradually "earn" the value of the business based upon a schedule the two of you agree to.

This is a time to be creative - there are many ways to buy an existing business - you just have to find a way that makes both you and the seller comfortable.

Hope you find this helpful,

Rhett

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QUESTION: The owner is interested in the earn out option or the insurance option. He wants me to get the business without having to actually pay for it. If we do go with either of these options would be the tax implications. Also it there companies that can do this for us. I live near Atlanta Ga

ANSWER: Yes you are right there are tax implications to everything, including how you take ownership of the business. In most cases, an earn-out works well because the two of you sort of become "partners" in the business and he naturally would be involved in training you if there was a need for that. Plus, he still makes money (via part ownership or receiving a percentage of gross) while you take over the main work of the business. Further, you arrange it in such a way that you only pay him a certain amount of money based on gross volume or sales; thus if the business is not doing well or some unforeseen thing happens, you are not paying any more than you should for the business. So as the business makes more, you pay more.

As in all business sales, consulting an accountant will give you the specific details on the best way to proceed for tax purposes.


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QUESTION: The earn out seems to be the best option.  A few questions. The owner currently has all the stock in the company. The owner estimated the business at 3 million.
Can an earn out be used when no money is transfered. And if the stock is worth 3 million in his eyes would I be paying tax on the stock that is given to me.

Answer
Here again you have multiple ways of proceeding...

Assuming the company is a corporation (stock), then you can do a transfer of stock from him to you. As such, you take on all debts, liabilities, and assets. This is the most straightforward way to sell because there is merely a signing over of stock certificates to the buyer. Keep in mind, this means you have every possible liability (known or unknown) that the business may have. It is good to really know the business before doing this.

There is no sales tax on the furniture, fixtures and equipment of a stock sale. This saves money. There is no public notice of sale (such as a bulk sale notice) so it saves time.

A downside for taxes is that assets are normally fully depreciated in a stock sale.

You could do an asset sale, which means basically you are buying the assets of the business, but not the liabilities or debts. Those are paid off in the sale. However, you might need a bulk sale, which lengthens the time and anything like contracts of licenses cannot be transferred. You must start anew.

For your situation, it sounds like a stock sale may be the best route for you. You must be sure to obey the rules of your state and supply any documentation they need to complete the transfer. There are some new rules of SEC which make it actually easier to sell stock than it used to be, but it is still a good idea to consult an attorney before you make it final.

Keep in mind an earn out is simply the way you pay - nothing more. You can arrange it however you want. You could say you will pay x amount of dollars over x amount of time depending on gross sales over that time. That way your payment for the business is commensurate with the money you are making.

Rhett

Selling or Buying a Small Business

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Rhett Kniep, CBB

Expertise

I advise others on how to value a business, how to sell a business, and how to buy a business, and give guidance on critical issues such as negotiation and growth strategies. I have knowledge and experience in real estate investing, including company entity structures and raising investment funds.

Experience

I have been a licensed agent and broker for over 12 years, selling commercial real estate, residential real estate, and businesses. I am a licensed building contractor of more than 20 years, and have both designed and built commercial and business structures, in addition to selling them.

Organizations
California Association of Business Brokers, Contractor's State License Board, CA Association of Realtors, Better Business Bureau

Publications
The Contractor Investor, published by Phi Logos Publishing 2011, by Rhett Kniep (book on real estate investing for building contractors) Ezine Articles Diamond Author www.Centurion7.com Blog

Education/Credentials
Certified Business Broker, California Association of Business Brokers, AA communications and am a student at Lincoln Law School in Sacramento. I have done numerous trainings over the years in real estate investing, real estate sales, and marketing.

Awards and Honors
Stormy Sebring College scholarship, Service Award Good New Rescue Mission, Film School certificate

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