There comes a time in every online business owner’s life when he or she decides that it’s time to take a step back and sell all or part the business. A successful business requires effort and dedication and oftentimes sacrifice. You put so much time into it that a business is sometimes compared to a child. Like a child the business crawls, walks, runs and ultimately leaves the nest. When it’s time for you to sell your online business there are certain things you should be aware of before making arrangements with a buyer.
Have an Idea What Your Business is Worth
Several factors go into the valuation of a business, particularly one where most of the revenue generated is online. The industry the business is in certainly plays a part. An online store that sells products that are in fashion or unique may command a higher asking price while a business whose goods are very seasonal or out of favor might not.
For most online stores sourcing and shipping the product is a key factor in fulfilling orders. Is there a team currently in place that the new owner can rely on to carry on these duties? Is there an inventory management system being used to reliably track inventory?
The sales channel that the products are sold on is another key factor. Does the seller have a website where the goods are sold? A website with a strong domain and plenty of online traffic would be more attractive to a buyer. Are all the items sold on only one channel? A business whose products are sold on multiple channels might be more favorable as it might leave you less vulnerable to the whims of that particular source.
The Money is in the List
An online business is also more than just the product it sells. There are other intangibles, known as goodwill, that make a big difference in its value. A business that has an email list that’s active has the upper hand compared to one that does not have a way to independently reach out to its customers.
Every business has a reputation and that matters too. An online business builds trust with its reviews. When customers go online and see positive reviews it gives them confidence that they will get the product advertised. It’s that reassurance that helps build a reputation, provide recurring sales and even allows an owner to increase prices. According to Branding Magazine a company that has a good brand builds trust but also provides for a host of other benefits.
Numbers Don’t Lie
A thorough review of the business’ financial statements is a must for any buyer. Anyone can claim impressive sales and earth-shattering income but the numbers don’t lie. A business that is being sold should have its bookkeeping in order. The books should include, at minimum, an income statement which shows the profits or losses made and a balance sheet that lists all assets, liability and equity. When the selling price is significant it is not unusual for the buyer to ask for tax records to verify the numbers. A seller might inflate their income to a potential buyer but are less likely to do so to the IRS.
Once you have a good handle on the target business it is best to look at recent sales of businesses in that industry. If similar businesses have sold for several multiples of revenue or income then that is a good starting point when negotiating. In the end though a business is worth whatever two parties are willing to agree upon.
Business Sales and Tax Considerations
A business owner should think about the tax consequences of transactions, particularly one with a significant sale price. With the exception of businesses acquired with the exchange of stock, most sales will result in the seller paying some amount of tax.
Your entity type is important and will have an effect on taxes for both the buyer AND the seller. A business that is structured as a C corporation is taxed twice. Once when the corporation pays tax on its income and again when the owners take money out. The owner of an unincorporated business, or S-corp, will avoid this by paying tax only once at the owner’s tax rate.
As of this writing the highest tax bracket at the federal level is 37%. Then there is also the potential of state tax on the sale. The tax bracket a seller is in depends on all their income sources including the income earned by a spouse (if filing jointly). This is where tax planning can really be beneficial so that the money recognized from the sale is taxed at the lowest rate possible.
When a business is purchased it’s either the stock or the assets that are acquired. Typically, in cases where the business is a corporation, it’s in a seller’s best interest to sell the stock of the corporation.
There are instances where buyers demand to buy the assets of the business instead. This is generally less favorable to the seller who will have to recapture any depreciation on the assets being sold and pay tax at ordinary income tax rates.
There is, however, a best-of-both-worlds election that would allow the buyer to acquire the assets of the business while also allowing the seller to be taxed as if it sold its stock. That’s good news for the seller who, after selling the stock of the corporation, would pay tax on the capital gains. If your business is less than a year old and you sell it for a profit then that money is taxed at your ordinary income tax rate. If you own the stock for more than a year the profit is taxed at long-term capital gains rates which is anywhere from 0-20% depending upon the income of the shareholder.
The higher the asking price the fewer buyers who might be willing or able to pay the full amount at once. In those cases some sellers can opt to conduct the transaction as an installment sale. In this structure the buyer receives the money over a period of at least a year. Gain is recognized on installment sales as payments are received. The downside is that the seller is essentially financing the deal and carries the risk of the buyer defaulting before all payments are received.
Sales Tax When Selling a Business
Sales tax is another issue that should not be overlooked. If you own a business it is important to be compliant right through the last day the business exists. It is possible to be assessed penalties for unfiled sales tax returns even if you owe no tax. States will also expect that surrender your sales tax permit when you close the business.
Sales tax also comes into play when the buyer purchases assets from the seller. In most states this will result in a taxable transaction.
As you can see there are many things to consider when selling a business. Knowing what to expect beforehand will not only allow you to negotiate a fair price but also carefully plan for the events involved in a sale.