Articles & White Papers


by James A. Castleman, Esq.

      All business owners eventually get out of their business. The circumstances may be good or bad. Someone may walk through your front door and offer you more money than you ever expected. Or, perhaps you are passing down your business to your children. Maybe you have figured that it is time to retire. It could be that times are tough, and you just cannot make it financially. And, for many of you, you are going to go out feet first in a casket with a wrench or a pen or a computer keyboard in your hand. 

      In all of these scenarios, there is a potential to sell your business. Even if it means that you are selling the business to your kids, or that you are trying to find a buyer who might be able to use your assets more profitably than you, or that your widow is trying to get value for the business, a sale is going to occur.

      The point is, that if you own a business, then you should run it in a manner that will maximize what ends up in your pocket after a sale. If you are thinking about selling your business, then the advice given in this article is critical. But, even if you are not thinking of selling your business, please take the advice in this article to heart, because you do not know what the future may bring, or how soon it may arrive.

The Basics - Get Your Affairs in Order

      My first piece of advice has little to do with the operation of your company:  Make sure that you have a good accountant and lawyer.

      Ultimately, the sale of your business is a financial transaction. The tax consequences of selling can vary greatly depending on the type of entity you have and how you structure the sale. The earlier you talk with your accountant and lawyer, the better chance you have of structuring a sale that will maximize what you net from the sale. No matter how high the sale price, it does not do you much good if most of those proceeds end up going to Uncle Sam. 

      My second piece of advice is: Always operate your business as if it is for sale. This means keeping it both physically and financially attractive. Any business broker will tell you that you will attract more potential buyers and be able to command a higher purchase price, if your floors, offices, and equipment are clean, if you have well lit reception areas in which to greet your customers, and if the front of your building and signage is freshly painted. 

      By the same token, your books should be in good order as well. To be able to put a price on your business, you have to know how much you are actually making. What are your sales? Where do they come from? What are your expenses? Are they justified?

      And, no matter how much you claim to be taking in as unreported cash, a potential buyer has no way to confirm it. Aside from the illegality of this, other problems arise as well. Potential buyers may believe that, if you are cheating the government, then you are going to cheat them too. Financial institutions that are going to provide funding for the purchase are going to want to see books of account, to ensure that their borrower is going to be able to pay them back. And, the buyer’s lawyer is going to advise him that there is a risk that the IRS is going to come in and put a lien on the assets he buys, even after the sale, if you were keeping inaccurate books. Whether you like it or not, these are real issues. 

What are you Selling?

      Before you sell a business, you have to determine exactly what it is that you are going to sell. Do you own the real estate on which your business is located? If not, do you have a long term lease? Are you selling your business as a going concern? Are you just selling the physical assets of your business? If you are incorporated or an LLC, are you selling the entity itself, or just the assets of the business? 

      If you own the real estate on which your business is being operated, it can be a difficult decision as to whether you want to sell the real estate along with the business itself. By selling everything together, you may be done with it free and clear. On the other hand, there may be more people able to afford just the business itself, and retaining the real estate may generate ongoing rental income, as well as potential capital appreciation in the value of the real estate.

      Before you make a decision, it is worthwhile knowing what everything is worth. Your accountant or a business broker can help you determine the value of your business as a going concern. Generally, businesses are valued based upon the income that they generate. How much would someone be willing to put into your business to generate the income that you get? If someone can make more money in interest on CDs, why would they want to risk it on buying your company? 

      A real estate agent can give you an idea about how much your real estate is worth. That will help determine the total sales price you should be looking for, or whether you may be better off holding onto the real estate and charging rent. And, perhaps the real estate by itself has more value to a potential developer, than the real estate being sold as part of your company’s operation. This may seem pretty basic. But, in fact, I have had clients that have not realized how much their real estate is worth when it is to be used for some other purpose, until they have decided to sell their business. 

Who is going to buy your Business?

      How you are going to sell your company may well depend on who you are selling it to. A sale to an outsider may be very different from a sale to your children, which may be very different from a sale to an existing employee. Your goals for each of these types of sale may be very different. 

      If you are selling to an outsider, then you usually want to maximize your sale price and protect yourself as much as possible from consequences of a sale. You probably want to get a significant amount of money up front, perhaps wanting to get the full sale price in one lump sum. You may want to completely terminate your involvement in the business at the time of the sale. And, you probably want to make sure that you are protected against having to deal with customer complaints (whether about work that you did, or about work the buyer is going to do), against IRS claims, and against potential environmental claims. 

      In a sale to your children, or even to an existing partner, you may have fewer concerns about some of these issues. You may be willing to sell your business at a discount to your children, since it is your intention that they end up with it eventually anyway. You also may have fewer concerns about the risks of such a sale. 

      A sale to an existing employee may fall somewhere in between. If it is a long term employee with whom you have had a good relationship, then you may feel better about not getting absolute top dollar. By the same token, this is not someone that would otherwise be inheriting your assets. What exactly is the deal that you are willing to make with this person? 

How Should You Structure the Sale, and are You Willing to be the Bank?

      Do you want to get one lump sum for the sale of your business? Or, are you willing to take payments over time? If so, then how much do you want to get up front?

      After you have determined how much each element of the sale is worth, do you want to sell just the business, or do you want to sell the real estate too? Are you better off selling the business, and leasing the real estate to the purchaser? Do you want to sell the business and lease the real estate, but give the buyer a future option to purchase the real estate, or a right of first refusal if the real estate is going to be sold in the future? 

      Are you selling the existing business name, or do you want the buyer to hold himself out as a new entity? Are you willing to provide consulting services for a period of time, if the buyer wants you to help out? Are you willing to give the buyer an agreement that you will not compete with him or go to work for another similar company in the area? 

      A huge question is whether you are willing to take back paper for the sale. If so, how much? How much risk are you willing to assume? And, if you are willing to take back a Note for part of the purchase price, how much interest do you want to get?  

      The answers to all of these questions not only determine how much money you end up with at the time of the sale, but also determine the tax consequences of the sale. A sale for a single lump sum may eliminate risks and assure that you have received as much cash as possible up front; taking back a Note for part of the purchase price and/or leasing the real estate may allow you to stretch out the tax consequences and pay taxes on the sale at a lower rate. How you apportion the total sale price to the various assets that you are selling also has significant tax consequences. In fact, the tax consequences can dictate the structure of the entire sale.

      As an example, if you own your business as a “C” corporation, then a sale structured merely as a sale of the assets of the corporation can be disastrous. The corporation will pay a tax on the gain from the sale of the assets, and then you will pay a tax on what is considered as a distribution from the corporation to you. If done this way, the taxes could potentially eat up more than one-half of the sales price. The tax burden can be greatly offset, however, by structuring the sale as a sale of stock and/or attributing part of the sale price to a personal consulting agreement, or personal covenant not to compete. 

      Even if you are not a “C” corporation, there can be significant tax consequences related to attribution of the purchase price. The sale of assets from an “S” corporation or an LLC may be taxed at lower capital gains rates, while payments for a consulting agreement may be taxed to you at ordinary income rates. On the other hand, the purchaser may be willing to pay more for your business if he can attribute part of the purchase price to items such as a consulting agreement, for which he can take a full deduction for all payments. Generally, the purchaser cannot take a deduction for the purchase of assets, but has to write off the purchase as depreciation over a lengthy period of time.

      All of this has to be analyzed and negotiated. And, every sale is different, depending on the perceived value of the business, the tax consequences to both sides, and the degree of risk aversion of each party.


      Run your business as if it is up for sale - because it always is. Consider the issues raised in this article and decide what you would want, and what you could accept. If you do so, then you will be prepared for that sale of your business that most certainly will eventually come, whenever it may come.


  James A. Castleman is a managing member of the law firm of Paster, Rice & Castleman, LLC, in Quincy, Massachusetts.

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