Where to start when selling a company

Selling or otherwise disposing of a business is a big decision, especially since a company usually represents a big chunk of an entrepreneur’s net worth. So there are incentives to wrap things up efficiently.

When CohnReznick Tax Partner Jennifer Krahling works with a business owner or owners looking to sell a company, one of their first questions is, “How much after-tax cash will I have after I sell my company?” she notes.

The way a business is organized — as a limited liability corporation (LLC), a Subchapter S corporation, or as a sole proprietorship — may influence the after-tax profit on the sale, she notes. “Generally, for a seller, a stock sale is usually — but not always — more advantageous than an asset sale,” she said. “But there are a lot of considerations, and the way a company is valued — whether there’s goodwill, for example — will also affect the final number.”

Planning is important. “If you can look down the road a year or so, taking steps in advance to maximize your company’s value may make a difference in how much you’ll be able to keep after taxes,” Krahling noted. “There are a lot of issues to consider.”

And she advises against fixating solely on the company’s structure. “To get the best price, the business’s books should be in order, and the owner and his or her adviser should take a deep dive into the company’s expenses to see if some should be backed out when determining the bottom line that a buyer could expect to see reflected on future financial statements. For example, is there a significant charge that’s really a one-time item? Or maybe the owner has a relative on the payroll who will no longer be working there once the business is sold. So, when you back out these expenses, the business may actually be more profitable and, therefore, may command a higher selling price.”

When Krahling and her CohnReznick colleagues worked on the sale of a New Jersey-based manufacturing and distribution company, which was organized as a Subchapter S corporation, there was a potential wrinkle: the owners wanted a stock sale, but the purchasers wanted to treat the deal as an asset sale. “So we negotiated,” she said. “The transaction ultimately did go through as an asset sale, but the buyer adjusted the price so the sellers were happy, too. When you have good information, you’re in a better position to make everyone happy.”

Business owners who want to put their company on the market should first “look at key metrics, including their normalized, or adjusted EBITDA, working capital, and the quality of the business’ earnings,” counseled EisnerAmper Tax Partner Jordan Amin. “We work with them to help establish a reasonable selling price, and to spot any potential issues that a buyer may point to, to try to reduce the price.”

Amin and his colleagues also analyze terms of a potential deal, and “we work with a client’s counsel to explain earnout and other terms, and to find out if the seller wants to continue working at the company after the sale,” he said. “Each component of the deal — including financial and operating terms — can have an impact on how much the seller will realize.”

Balancing act

Amin recently worked with a New Jersey-based manufacturing company — with multiple owners that had minority and majority interests — that was negotiating with a buyer. “To keep the deal on track, we helped the owners decide how to carve up the profits from the sale so everyone would be satisfied,” he recalled. “The transaction was successful for the sellers and the buyers. But every deal is unique.”

Marketing a company properly is also vital. When the long-time owner of a regional accounting firm – the patriarch and founder of the family business — decided to sell, “it was important to demonstrate that the company was poised for future growth and long-term profitability,” said Jonathan Jaffe, CEO of Jaffe Communications. “So we generated media coverage, bylined articles, and used social media to highlight a variety of initiatives that the firm was implementing, focusing on future profitability and sustainability. The goal was to generate positive conversations so potential buyers see the organization as a reputable, established business, with forward-thinking management that is fully poised for growth.”

The PR campaign included trade and general publications, blogs, and contacts with social media “influencers” who have large followings among C-suite executives. “The program was very successful, generating a lot of interest from potential clients,” Jaffe noted. “We were not involved in the firm’s sales transaction, as that was beyond our scope, but the owner was very pleased with the ultimate sales price, which he attributed to the added buzz and fresh messaging we created.”

By the time a business is positioned for a sale, you’d think that most of the internal partnership or corporate documents are in order. “But in reality, that’s often not the case,” according to attorney Aristotle Mirzaian, the founder of Curcio Mirzaian Sirot LLC. “It’s like a marriage — money, control, valuation and other personal issues can spill over into the sale of company. So it’s important to periodically review and, if needed, update ownership documents.”

In addition, “One of my first questions in a sale is ‘Did you talk to your accountant?’” he said. “That’s because it’s important to determine whether selling stock in the company, or an asset sale is possible, and which yields the most favorable tax and liability outcome.”

That was the case when the owners of a New Jersey salvage yard, which had been operating for decades, wanted to sell the business and retire. “If they structured it as an asset sale, their license would likely not have transferred to the new owners, who would probably not be approved for a new license,” he said. “So we structured it as a stock sale.”

But it’s not always a slam-dunk decision, warned Mirzaian. “Every transaction may have specific tax and other issues, as well as regulations that need to be considered. An attorney must engage the right professionals in order to comprehensively analyze the transaction — you can’t just look at a specific issue in a vacuum.”

When a business owner contacts attorney Ryan Notarangelo about selling his or her enterprise, “One of the first things I ask is whether they’re working with a broker,” said Notarangelo, a senior associate — whose focus includes business matters — with the law firm Dughi, Hewit & Domalewski. “While a broker can add extra cost to the transaction, a good broker can also make the sales process easier. If the client has one, then we work with the business owner and the broker to clarify what’s expected from each of us.”

A broker, for example, will generally draw up a Letter of Intent — the document outlining the proposed major terms of a prospective merger, acquisition or other business transaction. “We also advise clients to speak with their CPA about potential tax issues and to ensure that their financial statements are in good order,” he added. “The lawyer’s role is to understand the internal documents; bylaws; and operating, partnership or other agreements or covenants that may restrict the ability to sell the business.”

If the business has more than one owner, “then it may be necessary to get the unanimous consent of its members,” he noted. “A lawyer will scrutinize the company’s articles of incorporation or other documents to determine whether such an agreement is necessary and, if it is, to determine just who the necessary members are and how to register their consent. These are all important steps that should be addressed early on in the process, preferably before a buyer is identified and an LOI is issued.”

There’s “no standard checklist,” according to Notarangelo. But other issues typically include determining what will happen to employees and employee benefits after a sale, and the disposition of any property. “If office space or real estate or equipment is being leased, for example, can the lease be assigned to the new business owner?” he explains. “Also, are there any liabilities that the new owner will assume?”

In New Jersey, he added, “in general, whenever there’s a bulk sale — or transfer or assignment of an individual’s or company’s business asset, in whole or in part, outside of the ordinary course of business — the purchaser should notify the State Division of Taxation at least 10 business days in advance of the sale. This will allow an escrow account to be established if the seller has potential tax obligations. That’s important — if the proposed sale is not reported to the Tax Division within that timeframe, the buyer may inherit the responsibility for any tax liabilities.”

Dughi Hewit was called in to advise on the sale of a general medical practice in New Jersey, Notarangelo related. “The buyer wanted to ensure that the physician would stay on for a period, so the patients would be more likely to stay with the practice under the new owner,” he explained. “We worked with our client, the seller, to develop a timeline that was compatible with his desires, and we helped to craft a non-compete clause acceptable to both parties. The physician selling the practice was satisfied because he knew how much longer he would be working, and the buying physician liked the fact that his patients would have continuity of care. When both parties address these and other issues early on, there’s a better chance that everyone will be satisfied.”