What are Small Businesses for Sale?
A Small Business for Sale is defined as a commercial endeavor whose purchase is made available to the public. When businesses are offered for sale, the owner is looking to legally transfer ownership to the purchasing party.
Typically, the purchase of a small business for sale will take the form of one of the following:
• Stock Purchase: The buyer purchases a portion or all of the seller’s stocks. A seller of a small business will prefer this method because the buyer assumes his or her debts and liabilities.
• Asset Purchase: The buyer purchases a portion or all of the seller’s assets. A stock purchase is favored by buyers because they secure the assets attached to businesses for sale—including all of its inventory and equipment—without assuming the seller’s debts and liabilities.
• Merger: Occurs when two combines agglomerate to form a single, new entity. This method is liked—depending on the circumstances—by both the buyer and seller because a merger entails a tax-free exchange of stock in the new company for stock of the previous entity.
Regardless of the purchase, the transaction will be structured with the following steps:
• Businesses for sale will require a pre-negotiation meeting between the buyer and seller
• A small business for sale will require preliminary negotiations before an affirmed figure can be reached
• The buyers and sellers must draft a formal contract that establishes the agreement to purchase and a pre-closing review
During the pre-negotiation process, the buyer and seller of the small business will review fundamental aspects before an agreement can be reached. During this phase, the seller will establish the minimum price he or she is willing to accept for the business and the buyer will establish the maximum price he or she is willing to pay.
The pre-negotiation process for businesses for sale will also include an evaluation of how the value of the business was calculated. After this is confirmed, the two sides will inspect the seller’s financial condition, including a review of the entity’s balance sheets, profit and loss statements and income/expense balances.
During the initial phase, the parties will be required to discuss and agree on several matters, including:
• Necessary documents that were not examined during the pre-negotiation phase, such as federal and state income tax returns, property/equipment leases and employment contracts.
• Is the approval of the board or shareholders necessary to finalize the sale?
• Is government approval required? Is a certificate of good standing (indicates that a business for sale was properly formed and authorized to conduct business) necessary?
• Will any employees be retained by the owner of the small business for sale? If so, the buyer will have to draft new employment contracts; if not, the seller will have to provide compensation to those employees.
• Are there any contracts which require third-party approval before the purchaser can assume control over them?
The Letter of Intent:
After this review, a letter of intent is typically constructed. This document will show that the buyer and seller are serious about the engagement. The letter of intent affirms the agreement; however, they are typically instituted as non-binding contracts. That being said, portions of the LOI may be enforceable; a letter of intent should contain the following information:
• The length of time the buyer and seller are willing to keep the deal open
• A guarantee by the purchaser not to disclose confidential information ( such as trade secrets and customer lists) to third parties or the public—this is known as a confidentiality agreement
• A guarantee by the seller not to negotiate with other prospective buyers for a certain period of time.
When the two parties assent to the above stipulations and issues, the formal agreement and pre-closing period can commence.
Formal Agreement and Pre-Closing Period:
A final agreement is the culmination of the aforementioned negotiation periods. The agreement must contain all the details of the transaction: the sales price, when ownership will be transferred, etc. Typically the agreement will be produced in several drafts—it is not legally affirmed until it is signed by both parties.
During the pre-closing period, the following details must be discussed and reviewed:
• Both parties must count and inspect all inventory associated with respect to businesses for sale
• Both parties must inspect all leases, contracts and loans—these must be assigned to the buyer of the small business for sale
• A bill of sale for assets must be constructed if the goods are being sold
• The parties should arrange for escrow—a third party will hold the funds used for purchase until all conditions of the sale have been met
The closing period denotes the completion of the deal. During this time, both parties should review the following:
• Make sure all documents are signed and notarized where required
• For the buyer: disburse the proceeds by paying the underlying creditors, government (for unpaid sales taxes), the escrow agent (if applicable) and the remaining balance to the seller.
• Record all documents (deeds, titles and certificates) for record keeping.
Types of Small Businesses For Sale
A Small Business for Sale may exist in a variety of classifications with regard to the status of the business subsequent to the sale; while one Small Business for Sale may be sold in the form of an idea or a business plan, another Small Business for Sale may be in an operational state immediately after purchase:
‘Startup’ Small Businesses for Sale are considered to be a commercial endeavor available for purchase, whose availability occurs during the earliest stages of business development; this can range from mere business plans outlining a business structure to commercial activities within their premature organization
‘Turnkey’ Small Businesses for Sale are defined as a commercial endeavor available for purchase in a state of operation, which typically will not require startup costs or developmental administration; the term ‘Turnkey’ spawns from the notion that the purchaser of this Small Business for Sale will have the ability to initiate the operation of the business immediately after purchase:
The Classification of a Small business for Sale
The Fair Work Act of 2009, which is comprised of regulations set forth by the United States Department of Labor (DOL), states that a Small Business for Sale is classified as a business – or commercial activity – available for purchase within which the following classifications apply:
A Small Business for Sale will typically be privately owned
A Small Business for Sale will typically have an employee base not exceeding 15 individuals
A Small Business for Sale will typically render and incur a profit margin and earnings reports that are substantially smaller than those belonging to middle and larger sized businesses
Taxation for a Small Business for Sale
Subsequent to purchase, a Small Business for sale is subject to applicable taxation requirements, which include employees, provide benefits, and liabilities undertaken by the Small Business:
IRS Form 8829: This form is used in order to claim any expenses that are incurred as a result of operating a self-employed Small Business for Sale subsequent to its purchase; typically, this form is specific to online-based Small Business conducted from one’s home or residence
IRS Form 1040: This form is a standard form used for filing taxes applicable to a Small Business for Sale subsequent to purchase; line 30 on this particular form entitled ‘Schedule C’ allows the owner of an small business purchased in order to substantiate profits or losses as a result of operating an online-based small business within the realm of self-employment
Schedule C – EZ: Subsequent to purchase, a Small Business for sale employed to operate from a residential base of operation – reporting business expenses not exceeding $50,000 – will be required to satisfy this tax form