There are many different things that can be included in the sale of a business. We’ll discuss what is typically included in the sale price so that you will know what to expect and be prepared to negotiate effectively. When buying or selling a business, many things are negotiable.
When a seller is comparing two offers, it’s important to make sure they understand exactly what is being included in each offer so that they can determine which one is better. It’s not always about the higher price. It’s also about what is included in the offer. For business buyers, this article will offer tips on how to structure different offers depending on your needs and the desires of the seller.
When it comes to the sale of large businesses such as manufacturing and distribution companies, inventory is usually included in the sale price of a business. For the sale of small retail businesses, typically, inventory is not included in the sale price of the business.
For businesses that don’t include the inventory in the price of the business, normally, the buyer takes a physical inventory right before the closing and then pays for an amount in addition to the purchase price based on the cost that the seller paid for the inventory. In some cases, the inventory price can be adjusted down for old and not very sellable items. The theory behind not including inventory in the purchase price of a business is that it fluctuates, so this can affect the value of what is being transferred, and therefore there should be an adjustment for the inventory on hand.
Sometimes a minimum dollar value of inventory is included in the sale price, and if the inventory is lower than that amount, then the price will be adjusted down based on the amount of inventory below the specified amount.
In most cases, the answer is yes. The exception is when specific items are specified by the seller as not included in the sale. This may be because a vehicle might that is used partially for the business is also the seller’s personal vehicle. Or there may be small items that have sentimental value. But in general, the fixed assets of the business are included in the sale price because they are essential to the operation of the business.
This can vary quite a bit. In a small asset sale, the account receivables and accounts payables are not usually included in the sale of a business. The buyer gets a clean slate, and the seller pays off the accounts payable prior to the closing, and adjustments are made if certain accounts payables have not been paid off. The seller then collects the accounts receivables for sales that were made before the closing but not collected.
Whether the sale is structured as an asset sale or stock sale also usually affects what is included in the sale price. In a stock sale, the accounts receivable and payables are typically included in the sale price, so the buyer would be responsible for paying off the accounts payable, but they would also collect the accounts receivable. With an asset sale, the buyer doesn’t get the accounts payable or receivables in most cases. However, the larger the deal, the more likely it is that accounts receivable will be included in the sale price.
Working Capital is the difference between current assets (which includes cash, accounts receivable, and inventory) minus current liabilities such as accounts payable. For larger deals over $1 Million in the sale price, working capital is often included in a buyer’s offer, particularly if the buyer is a private equity firm. When working capital is included, it usually specifies an amount of working capital that is at a healthy level to run the company and pay the bills without financial pressure. When working capital is not included in the sale price of a business, then the buyer either needs to have sufficient working capital on hand to run the business when they take over, or a bank can provide working capital financing.
In most cases, the answer is yes. Intangible assets include goodwill, the companies name, intellectual property such as patents, trademarks, and copyrights. Most intangible assets are necessary for the continued operation of the business post-sale and are therefore included. However, in some cases, a company may have developed a new technology or patent that they have not begun to market yet. They may decide to sell the rest of the company that has ongoing revenue and profit that a buyer is happy to pay for. Then post-sale, the sellers are free to focus all of their efforts on marketing the newly developed product or service. In this case, the business sellers clearly specify that this intangible asset is not included in the sale price.
In other cases, a seller might sell part of the business and define what intangible assets are the assets required to run each part of the business. In this situation, they will define which intangible assets go with the business sale. They may determine that they can get more for the business when the different intangible assets are acquired by different buyers.
When a business owner does not own the real estate, they will usually transfer the lease to the business purchaser. When the business owner also owns the real estate, they may sometimes include the real estate, and sometimes they may lease the property to the business purchaser with an option to buy the property later.
When selling business with real estate, we usually counsel sellers to keep an open mind and provide buyers with the option to purchase the real estate or not, depending on the needs of each buyer. This gives the seller more options to evaluate different offers that contain real estate and those that don’t. Some buyers may give you a great offer for the business, and if the seller feels comfortable with the buyer, then they are often OK with this scenario. Some sellers prefer to include real estate with the sale if they want to retire and not worry about collecting rent. A good business broker will understand the seller’s needs and get the right buyers to meet their goals. Keeping an open mind allows you to see how you feel based on the details of a specific buyer’s offer.
In a stock sale, the corporation is included in the sale of a business. In an asset sale, the corporation is not included in the sale of the business. Usually, with an asset sale, the buyer sets up a new corporation that acquires all of the assets of the business being purchased. In most cases, one of the assets being acquired is the right to do business using the companies name, which goes with the sale of the business.
In most cases, the long-term debt is not a business liability that the buyer assumes. The seller usually pays off the long-term debt before the sale is made. In some circumstances, particularly in stock purchases, the buyer may assume the company’s long-term debt. The seller may be unable to pay off the long-term debt, and the buyer may have better financial options and is interested in acquiring valuable tangible or intangible assets that come with the business.
In most cases, yes, the buyer is purchasing all future profits in the business. However, in cases where the buyer’s offer includes an earn-out, the seller is able to share in some of the future profitability of the company. This is sometimes done where the seller wants to retain the buyer’s services post-sale and incentivize the seller to grow the profitability of the company. The seller may see an opportunity to capitalize on a larger total payout with a buyer that can leverage the seller’s company to maximize future growth.
There are tax implications to what is included when you sell your business, including the capital gains tax. Some business assets included in the sale may benefit the taxes of a seller, and some may benefit the buyer. When selling a C Corporation, it typically benefits the seller to include the corporate stock, so they may have to entice a buyer to purchase the stock by lowering their selling price. When you have multiple offers, it gives you the opportunity to evaluate them based on the tax consequences as well as the overall price that you are getting.
If you are interested in buying a business, please view our businesses for sale. If you are interested in selling a business, please fill out our brief form for a confidential consultation.
