Structuring Small Business Sale Transactions

Selling a privately held business is often romanticized as face-to-face negotiations over business valuations and purchase price. Whether small or large, business transactions can be extremely complex and require a great deal of work behind the scenes. As the size and/or complexity of a transaction increases, the need for innovative structuring options also increases. Deal structure, financing, and tax management must be a proactive process that is addressed at an early stage. In many cases the Seller and Buyer often place all of the focus on the transaction price at the expense of the ‘net results’ of a business transaction. By carefully negotiating the terms and structure of the transaction, a business seller could walk away with a deal that provides a significantly larger economic benefit than a transaction that provides 100% of the proceeds at closing. For asset sale transactions, the ‘allocation of purchase price’ can become another area of negotiation after the price, terms and conditions of the sale have been agreed to by the buyer and seller. Each type of structure carries with it different tax consequences for the buyer and seller, having a material impact on the overall value of the transaction. The type of business entity owned by the seller (C-corporation, S-Corporation, LLC, Partnership, or Sole Proprietorship) in addition to whether the transaction becomes an asset sale or stock sale will have a major bearing on the decisions made in structuring the transaction to afford maximum economic benefits. The purpose of this communication is to advance a few of the techniques available in structuring small business sale transactions and to emphasize the value an experienced team brings in structuring the transaction. Asset sales of pass-through entities (LLC, S-Corp, & Partnerships) are handled very differently than stock-sales of C-Corps and it would be impossible to cover all of the structuring alternatives within this short document. Proper legal and tax counsel should be retained and the cost of these professionals is usually offset by the benefits they bring through their involvement in the transaction.

The following factors will be relevant in structuring the transaction:
1. Legal Business Entity


- S-Corp

- C-Corp

- Partnership

- Sole Proprietorship

2. Type of Sale

- Asset Sale

- Stock Sale

3. What is being sold

- Entire business

- Partial Interest / Investment

- Inclusion of Real Estate

4. Installment Sale or component of Seller Financing

5. Who is the buyer

- Financial Buyer (Entrepreneur)

- Strategic Buyer

a. Corporation

b. Private Equity Group (PEG)

c. Family Member (Succession)

6. Plans after the sale (Short term/Intermediate/Long Term)

- Consulting Contract

- Employee Contract

- Covenant not to Compete

7. Personal Tax Situation


1. Asset Sale / Stock Sale
Determining what is being sold, the individual assets of a business or the stock in a corporation, will be critical in determining the optimal structure of a transaction. The majority of small businesses that are sold each year are structured as an asset sale. An asset sale is when a buyer purchases all or a portion of the assets of a business (e.g., facilities, equipment, vehicles, real estate, etc) whereas a stock purchase is the purchase of the ownership shares/rights of the corporation – all assets and all liabilities of the entity are retained by the corporation and only a change in corporate ownership has occurred. The following highlights three notable differences between each method; there are many additional considerations so it is critical to consult professional advice to determine the most appropriate method.

Change in Legal/Tax Entity:
With an asset sale, the legal entity and tax identity do not transfer to the purchaser. The Buyer receives a stepped-up tax basis in the assets acquired equal to the FMV purchase price, the point from which new depreciation is started. Under a stock sale, the tax basis of the assets remains unchanged, and all of the tax attributes, including depreciation methods, tax year, corporate tax election, are preserved.

With an asset sale, the Buyer’s liability is limited. The Buyer is purchasing some or all of the assets and has the option to identify any liabilities they are interested in assuming. Under a stock sale, the Buyer purchases the stock of the company and assumes all liabilities (known, unknown, contingent or otherwise).

Exit or Succession Planning For Small Businesses

At some point in time in time every business owner will “exit” their business. In most cases, a small business represents a significant component of family wealth and the owner will be keenly interested in maximizing this value when the business is either sold to an outside 3rd party or key employee, or transferred through an orderly succession to a family member.

Unfortunately, most entrepreneurs are so immersed in the daily demands imposed in operating their company that they have neglected to properly plan for the inevitable transition of their business. The goal of this article is to briefly review the exit/succession planning process and highlight the importance that these plans have for every business owner. Whether the goal is to exit the business in six months or ten years, it is critical that a business owner recognize that succession planning is the single most important way to take control of the terms and conditions of exiting their business. Proper exit planning will reduce the variability of the business control transfer, and can secure a sound financial future for their family.


Exit Planning, also commonly referred to as “business succession planning,” is a methodology that addresses three critical questions a business owner will face at some point in time:

1. What is the timetable the owner seeks to exit the business?
2. Who will succeed the owner when the business is transitioned or sold?
3. How much income is needed from the business transition/sale for retirement?

The Exit Plan becomes a written roadmap that is developed in conjunction with legal, accounting, and financial professionals and is designed to maximize the value an owner receives when exiting the business. Exit planning can be a fairly complex long-term process and take many years to properly implement. The process can be broken down into succinct action items and deliverables and should illustrate how value can be received at a very early stage. A professional team will bring efficiency to the process by implementing a basic structure of steps to be followed, and can insure that the experience will be a personally gratifying and financially rewarding endeavor for the owner.

The key steps involved in developing an Exit Plan include:

1. Establishing Exit Objectives

• Determining the retirement timetable, long term income needs, and financial requirements necessary to reach them.

2. Identify the key drivers of business value

• What is the fair market value of the business if it were sold today?

3. Plan to build & preserve business value and reduce risks

• Activities that can be implemented to leverage best practices and maximize the business value.

4. Transfer of ownership, management, & control

• Determine the anticipated buyer (outside 3rd party, key employee, family member) and develop the structure for ownership transfer that maximizes financial security while minimizing taxes.

5. Contingency Planning

• Protect the continuity of business operations should an unexpected event occur.

6. Wealth management/preservation

• Secure financial independence by developing a financial plan to manage the income from the business sale.

7. Successful Exit

While nearly all business owners will recognize the importance of having a formalized exit and succession strategy for their future and the future of their company, very few actually have a plan in place. What most business owners fail to recognize is that the process is fairly easy to initiate and can be done at a minimal expense. While many components of the Exit Planning process will require the expertise of a CPA, Attorney, and Wealth Manager, significant value and efficiency could be achieved by implementing this process through a competent Business Intermediary/Brokerage firm.

An experienced business intermediary firm will be able to streamline the exit planning process significantly by taking the lead in the planning framework and tapping the necessary resources (accounting, law, wealth management) over time as they are required. This team concept is very cost effective for the business owner as he is only paying for the specific services at the time of use. A business owner is now able to put a toe in the water and establish the framework for the exit plan at very little cost. By establishing the current market value of the business in conjunction with a determination of the owner’s exit timetable and the income needed for retirement, the Business Intermediary will have the essential elements for the foundation of the Exit Plan.

Implementation should be viewed as a process versus a one-time event, and the most successful and rewarding Exit Plans are those that are started years in advance of the business transition. Whether the planned exit is six months or ten years from now, an owner should be proactive. The longer that a business owner has to implement the Exit Plan, the greater the opportunities will be to maximize the business value, minimize tax liabilities, avoid key employee turnover, and eliminate emotionally charged family issues.

The Role of a Business Broker

Selling a privately held business is a very complex process involving many variables and it is important for the business owner to seek expert advice. By developing the framework for a business exit plan and establishing a specific timetable of actions to be taken, an owner will have a clear plan of action and be in complete control of when and how they will be leaving the business. Understanding the current market value of the business and how that value is derived is critical to projecting the after tax proceeds that a sale would generate and how that number correlates to the funds required for either retirement or pursuing the next venture. In some cases, there are small changes that an owner can implement that would significantly increase the value of the company. Strategic planning coupled with a proven merger and acquisition process can increase the business value by thousands of dollars.

Traditionally, a business owner does not contact a business brokerage firm until the absolute last minute. In many circumstances, as with the case of divorce or failing health, this is unavoidable and a competent business intermediary firm will be able to assist with a timely valuation and sale of the enterprise. For the majority of cases it is critical to engage a business intermediary early. Professionals involved in the sale of businesses have a variety of titles including, business broker, intermediary, M&A consultant, and investment banker. These professionals are largely performing the same function, selling a business, but typically will differentiate themselves as it relates to the size of the business. The specialized knowledge and experience that a business intermediary has is invaluable in all aspects of the process. Selecting a professional who is experienced in valuations, confidential marketing, qualification of buyers, due diligence, and contract negotiations will be critical to completing a successful transaction. Although the economic challenges over the past two years have caused a dip in the prices of some businesses, there remains considerable interest from a wide range of prospective financial and strategic buyers.

Over the years, I have had the pleasure of meeting some incredibly talented, intelligent, and successful business owners and have a true appreciation for the enormous amount of work, time and sweat equity that has been devoted to building their companies. The majority of these owners were able to maximize the market value of their business through the proactive implementation of a strategic exit plan. Historically, a business owner sells only one business in their lifetime and it is the two or three years prior to the business sale that are the most critical. Ensuring that the proper structure is in place and that the financials are organized in a format which compliments the business enterprise and maximizes the value of the company, is a process that, when adopted early, can offer significant financial benefits upon the sale.

Strategic planning in a business sale provides the ultimate amount of control for the owner and, in most cases, the highest transaction value. Engaging a competent business intermediary who brings an experienced exit planning and transaction team will provide both peace of mind and financial rewards when the ultimate day arrives to sell the business.