Eight Key Steps to Selling Your Business

Follow these steps on valuing your company, negotiating the deal and creating a sales agreement.

This year, some 700,000 American businesses will be sold. Most will be small and mid-sized businesses like yours. If you, too, are thinking of selling, consider these practical steps for making the process go smoothly.

1. Determine a Realistic Price Range
If you price your business too high, you'll scare away buyers. If you price it too low, you'll risk selling at a bargain-basement discount. Your goal is to figure out a range that's realistic.

Pricing a business is both an art and a science. There are several methods you can use—and then maybe blend the results. For example, you can base the price on the value of the business's assets, and add in a sum for the goodwill the business has developed. Or you can see what comparable businesses in your industry and locale have recently sold for. Or you can use an industry formula (for example, a value based on the number of units sold annually or a multiple of average earnings) that will help set a price range.

2. Understand the Tax Consequences
Taxes can take a huge bite out of the money you receive for your business. It pays to know just how big that tax bite will be—and to try to lower it if possible. But be careful: taxes can get complicated. You'll probably need help from a CPA or other tax expert.

Your tax bill will be influenced by two key factors: How your business is legally set up and—in the case of a corporation or LLC—whether you're selling the assets or the entity. Sales of all sole proprietorships and almost all partnerships are asset sales. So are the sales of many corporations and LLCs.

In an entity sale, you sell all of the corporate stock in the company or all LLC members' membership interests. The buyer winds up owning the entity itself. In that case, the stock or membership interests are treated as capital assets. This means the gain is taxed at the low, long-term capital rate (assuming you owned the stock or membership interests for more than a year).

In an asset sale, you allocate the sale price to the various assets—for example, furniture, equipment, supply contracts, the business name—and you classify the assets in seven IRS classes, such as inventory, other tangible property and goodwill. The gain from property in some classes is taxed at ordinary income rates. The gain from property in other classes is taxed at the long-term capital gain rate, if owned for more than a year.

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