In the past year, millions of businesses were affected by the pandemic. According to CNBC, 60% of businesses faced permanent closures. If your business is at risk, you can still save your business.
You can adopt new practices and business models to survive. You can also rely on federal financial relief in the form of the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loans (EIDL). Or, you can sell your business. This article is here to help you with this last option.
Below, you will learn about the agreement involved when selling a business. At the same time, you will find a quick guide about what elements are necessary for a business agreement. However, please be reminded that this is not legal advice. It’s always best to check with a licensed business lawyer who is more knowledgeable about the transfer of business ownership laws, which varies for each state.
The Business Transfer Agreement
Selling a business can only be legally completed with a document referred to as the transfer agreement. Depending on the type of sale, the business location, and the governing state, a transfer agreement can also be called a business transfer agreement.
The transfer agreement puts into paper a verbal agreement between you, the seller, and a buyer. It legally confirms the sale of a business or parts of it and binds the transaction terms to the two parties involved.
Sell Your Business or Just its Assets
While there’s no signed transfer agreement yet, you can still decide whether to sell your business as a whole or just a part of it. Both methods are referred to as entity sale and asset sale, respectively. But whichever you choose, your transfer agreement will include what your business items are part of the sale.
Here’s what can help you decide.
Most buyers prefer an asset sale, while sellers prefer an entity sale. Asset sales are advantageous for buyers because they can avoid acquiring the seller’s liabilities. They can also get tax savings through tax deduction from depreciation expenses much quicker this way.
Asset sales, however, have a higher ordinary income tax rate. Because of this, entity sales benefit sellers because of a long-term, low capital gain rate.
Issues to Prioritize in the Agreement
Considering all of this, prioritize crucial issues such as which assets are included in the sale and how many shares are being transferred. It’s also important to indicate when the transfer will be completed and will the current staff be part of the transfer. You should also address if the transfer included accounts payable, loans, and other liabilities.
According to Forbes magazine, there’s a lot of complexity to consider when selling a business. The way a business is organized and the type of transfer or sale will affect the transfer of ownership.
If your business is incorporated, transfer of shares can be done freely but restricted by your company’s bylaws. If assets are involved, you’ll need approval from your shareholders and board of directors. Limited liability companies also have bylaws that can restrict a transfer.
On one hand, you will need approval from your business partner in a partnership firm. But if you are the sole proprietor, you can completely control a transfer of ownership.
To whom you will sell your business or its assets can also affect the transfer. Instead of outside buyers, you can sell your business to co-owners or even your employees. In other cases, entrepreneurs transfer ownership to family members, usually to the next generation.
Elements to Include in a Transfer Agreement
With all this in mind, basic information that you can include in your transfer agreement can include sections for what assets to sell, liabilities to transfer, terms of the transfer, and legal disclosures. Not all transfer agreements will be the same. But this basic information is key.
The asset section should cover all the financial, physical, and intangible assets included in the transfer plus the not included assets. The liabilities section should cover the outstanding loans, owed taxes, and accounts payable that will be transferred to the buyer.
The terms section should cover the transfer price, payment method, and date of transfer completion. Finally, the disclosure section should include all legal issues that may arise in the future once the transfer is complete.
New Opportunities Will Arise
Putting up a business requires a lot of money, time, and effort. That’s why it’s unfortunate to sell a business that you worked hard for. However, there are advantages to it. From earning a large sum of money to having newfound free time, selling a business doesn’t always end there.
Once the transfer is complete, you now have an opportunity to open an entirely new venture or get rid of an asset that’s proving to be more of a liability. All of this can make a transfer of ownership worth it. Hopefully, this article has helped you decide which road to follow.