The costs to sell a business can seem intimidating at first glance, but with anything, knowledge and planning is power. Business owners who can anticipate these costs end up spending less in the long run, so we would like to enlighten you on the hidden costs associated with most business transitions.
Formal Succession Plan
Less than 9% of business owners have a formal written succession plan. The value of having a written plan is that it helps you understand what you have to sell, and what options are available to you. This may seem like a minor benefit, but in many cases will guide a good portion of the transition and yield a higher profit.
It will also help save you thousands of dollars during the transition process by reducing the billable hours required by accountants and lawyers to organize your documents. Even after the transition, it can provide value because you are able to identify and mitigate a lot of risk for the buyer. This ultimately reduces the amount a buyer might hold back from an upfront payment.
Plans can range in price and are often based on hourly consulting fees, or sponsorship from a government program. The total price usually ranges between $5,000 to $80,000 for a small- to medium-sized business.
Having your business valuated by a professional can cost between $2,500 and $20,000, but the potential benefits of a valuation can be well worth the investment. Valuators will determine the worth of a business in greater detail than other methods, which means they may be able to find significant value in some areas of a business that may have been overlooked by others.
The cost of accounting can vary widely based on the business and its needs. Maintaining good books and records during the day-to-day operation of the business can make consistent accounting easier and smoother to do. If good accounting is done before the sale of the business, there is less work for an accountant to do during the sale process, which can save money and time.
It is recommended to have at least two meetings with your business’s accountant to talk about the tax implications of selling your business, as well as to go through the actualization of statements. Note that not all accountants are qualified to ready a business for sale, in some instances a specialized professional might need to be engaged.
During the sale process, it is very important to engage an attorney. They can help in the review of important documents, such as a lease, to understand what happens during the transition. It is imperative to use an attorney that understands commercial law to review a letter of offer from a buyer, and to have them draft the response as well as the purchase agreement.
Depending on the complexity of the business, they may also need to review employment law and the business owner’s obligations before, during, and after the transition to help mitigate liabilities and make for a smooth process.
While there are well-known costs associated with starting and running a franchise, there are often costs associated with selling the franchise as well. The cost of this transfer fee can be many thousands of dollars, and who will pay the fee can be negotiated between the buyer and seller. The transfer fee helps cover the cost of the franchisor’s assessment of the new buyer and any potential training for that buyer.
If trying to sell a franchise, it is important to start reviewing the franchise agreement early in the process so that extra costs don’t blindside anyone involved in the process.
The lease on a commercial space that a business is located in can impact the sale of the business. The situation that costs the most money is when the buyer wants to move the business, but there is still significant time before the lease expires. In this case, the business seller is obligated to continue paying the lease, whether they are using the space or not.
The easiest way to avoid these kinds of situations is to talk with the landlord (and review the lease agreement) to discuss potential costs, and solutions to potential problems that may arise during the sale. If there is a good standing relationship between the business owner and landlord, then they are often willing to help to avoid any major problems related to the lease.
It is also a good idea to review any lease agreement with an attorney during the succession planning process to ensure that there are no extra hidden costs.
Prepayment penalties are often the most overlooked cost of selling a business. Credit — like a line of credit, loans, and credit cards — do not typically transfer to a new owner; they will have to qualify on their own. A business owner will need to pay their business credit off, and sometimes there are fees for early repayment. These fees will vary depending on the individual business, but are often expensive.
If the buyer of a business is not interested in keeping some or all staff members employed during the transition, it is up to the seller of the business to ensure there is adequate severance pay for those employees.
Like any other purchase, there are taxes on the sale of a business. The type of sale (share or asset) will affect the taxes that need to be paid on this sale. While both types of sales have their advantages related to taxes, share sales tend to be more beneficial to sellers as there are several ways to take advantage of capital gains tax deductions and exemptions.
How to cut hidden costs
Sort of mentioned already, the best way to cut costs is through proper organization and planning. Having a formal succession plan in place years in advance of a transition is instrumental in this regard. It helps to outline what needs to be done when and keeps a straight path to a target end goal.
Traditionally, business sellers looked to M&A firms or business brokers to help them sell their business, but these options typically have commissions of 6 to 20% (on top of monthly retainer fees). There are other options as well though, including SuccessionMatching, which is designed to help small- to medium-sized business owners sell their business without having to pay a commission. Though there is a subscription fee associated with SuccessionMatching’s services, this is significantly smaller than the costs associated with M&A firms or business brokers.
Though the prospect of hidden costs can be intimidating, starting the succession planning process early and talking to trusted professionals can help you prepare, both by cutting unnecessary costs and by ensuring that there are adequate funds available.