Have you ever thought about selling your business? Or buying one?
For most people, doing so is a once in a lifetime event. Naturally, there is a significant learning curve to the process. My company, Codiligent LLC (www.codiligent.com) is a business brokerage that represents sellers of businesses with $500k to $20 million in annual revenue. I love what I do. Entrepreneurs are a very exciting group of people to work with.
Daily I learn about peoples’ concerns, questions, misconceptions, fears, and expectations related to buying or selling a business. Consequently, I decided to start a blog to share ideas and information on this interesting but often misunderstood subject. Some of the types of topics I anticipate covering include:
- What you can do to prepare your business for sale whether you anticipate selling a business today or five years from now
- Why the most common way of looking at value (a market comparable approach) may not be very accurate at all for a particular business
- Things that inhibit marketability of a business
- What the sales process should look like
- Things to consider when pricing a business
- What is involved with due diligence
- Terms to consider when negotiating a Letter of Intent
I welcome suggestions on topics, and an open examination and discussion of all topics. I’ve not published a blog before so bear with me as I get up to speed on how to use the blog software.
Something that I’m occasionally asked is the effect on organizational structure on marketability of the business. Everything else being equal, is there any reason why you would value of a LLC differently from that of a Scorp?
By: Kevin on August 4, 2008
at 8:24 pm
I don’t normally differentiate between a LLC and an S Corp when helping clients establish a value for their business for an anticipated sale. They are both pass-through entities. However, I am not a tax expert and I know that there can be some issues if someone has converted from a C Corporation to an S Corporation (like if it sold an appreciated asset and the appreciation occurred when the business was a C Corp) so this could potentially impact an acceptable deal structure. I also think that another often overlooked difference between a LLC and an S Corp that doesn’t really impact a sale but could impact equity capital formation is that in an S Corp the profits of the business must be split based on the pro-rata shares of stock (i.e. if there was a $1 million profit that was distributed and I own 10% of the stock, then I’m entitled to $100k), whereas with a LLC you can carve up the ownership and profits differently as laid out in the LLC agreement (i.e. you could have an investor own 50% of the business, but who receives a preferential return prior to another member, of say, 7%, but because of the priority return receives less than 50% of distributed profits, but who at time of sale receives 50% of the gain). Another thing to keep in mind is that most business buyers are very reluctant to purchase membership units in a LLC or stock in a corporation, and instead prefer to do asset acquisitions where the assets of the legal entity are sold to the buyer, the old legal entity is terminated, and the buyer forms a new legal entity. This helps protect the buyer from unknown or contingent liabilities and may provide the buyer with tax depreciation benefits.
By: bizsale on August 5, 2008
at 4:48 am