Business Selling FAQs
Click on the questions below to see the answers.
- How can I get a business valuation?
The Business Broker, or possibly your CPA, can help you with valuation. If a professional intermediary is marketing the business, ask them if a third party valuation has already been done. Only specialists certified to appraise businesses should be doing true business valuations. Many small businesses are not actually valued, but rather priced using market information, rules of thumb, and experience. Ask the broker how the business was priced.
- How do I deduct the cost of Goodwill I purchased with the business?
There is no simple answer or formula for evaluating this since The Tax code is always changing; so consult a professional on these matters. Currently, the cost of business intangibles such as Goodwill, covenants not to compete amounts, and trademarks are amortized over a 15-year period.
- How do I deduct the value of the customer list I purchased?
The Tax code is constantly changing; so always consult a professional on these matters. Currently, customer lists cannot be deducted in full at the date of the purchase. Generally, the fair market value of the customer list must be amortized over 15 years.
- What should I know about accounting and bookkeeping?
The importance of keeping adequate, legible, complete records cannot be stressed enough. Without records, you cannot see how well your business is doing and where it is going. This is your feedback mechanism and "report card." All business transactions should be documented with checks or credit cards. Undocumented cash transactions should be avoided if possible. At a minimum, records are needed to substantiate your tax returns under federal and state laws, including income tax and social security and sales tax laws. It also is necessary to substantiate your request for credit from vendors or loans from lending institutions. If you ever plan to sell your business, you will need to substantiate your representations and claims about the business. Speak to your local CPA to set you up on a good bookkeeping system. There are many good software programs that allow small business owners to keep their own books without being an accountant themselves. The IRS also has a wealth of information on their web site that helps small business owners to understand their record-keeping and tax obligations.
- Can I defer the Gains on the Sale of My Business by Buying Another One?
You should consult a tax consultant specializing in these transactions before considering this option. There is a possibility of deferral of gains on sales of certain types of corporate stock under Section §1045. Section §1045 essentially works like the old capital gains rules for the sale of a primary residence. Specifically, §1045 allows non-corporate taxpayers to defer (elect to rollover) the gain on the sale of Qualifying Small Business ("QBS") stock if the gain is invested in another business. Similar to the old law that applied to the sale of personal residences, the basis of the replacement QSB stock purchased must be reduced by the amount of gain that has been deferred.
This is a very brief overview of the complex rules under §1045. You should consult a CPA before thinking about this possibility. Please note: A Business Broker is not authorized to give you actual legal or accounting advice. Be sure to consult an attorney or CPA for advice in a business purchase or sale.
- How much is the business worth?
There is no simple answer or formula for evaluating the value of a business. The price that the business can command in the market will actually change for the same business depending upon the terms of the sale. There are appraisers that specialize in valuing a business. Professional business brokers can give a range of prices that will be fairly accurate for many small businesses, based on experience with the market, rules of thumb, and an analysis of financial statements and cash flow.
Some brokers believe that cash flow is the most important factor to consider in a small business sale, as the business must be purchased with that available cash flow for an owner-operator buyer to be able to survive after the sale.
Other important factors to consider include: competition, industry trends, and like-size comparison with other companies in the industry, balance sheet ratios, income statement analysis and trends, gross and net margins, type and condition of equipment, and future capital requirements, customer base: target, size, quality, diversification, location, avenues of growth for the company under new ownership, owner's role, now and after the sale financial needs and goals of the buyer and the seller, difficulty of someone else learning the business, and potential for growth in this business and in the industry as a whole.
A professional Business Broker can assist you with this.