How to sell a business

May 29, 2015

If you own shares of a business that is publicly traded on a major exchange, selling them is pretty simple. You can look up the share price in a newspaper, which is difficult these days as stock listings in newspapers have become rather limited, or you can go online while calling your broker on a landline, and instruct him or her to sell the stock. You can also look up the stock on your smart phone, and send online instructions to sell within your electronic stock account.

And, if you’re deceased? No problem had you done proper estate planning i.e., you have a will, a durable power of attorney and a living will. This allows the agent you appointed to use your durable power of attorney to make the trade.

But, what if you own the company and you’re not Warren Buffet?

Warren Buffet’s heirs can easily sell their shares of Berkshire Hathaway because it is a publicly traded company. The heirs of small business owners do not have this luxury, as the shares are not publicly traded.

So who’s going to buy them? Perhaps a competitor will offer pennies on the dollar to the heirs during the terrible grieving time and maybe they’ll take the offer because they don’t believe others will be forthcoming. To add salt to the wound, the government could demand millions of dollars nine months from the date of death because of the estate tax.

Are you in this situation? You could be if you are the owner of part or all of a small business, with no buy-sell agreement.

OK, we’ve outlined the problem, now for the solution.

The first step in establishing a buy-sell agreement is to find a buyer. It could be a partner, an employee, a group of employees, a family member, another business or even a competitor. Who said this would be easy?

Step number two is to establish a price at which the business is sold based on disability, retirement or death. In most cases, the retirement section will yield the highest price because the business seller will usually stay on board for a period of time to provide a steady transition. Obviously, this would not be the case in disability or death.

The third step is to provide funding for the agreement. The retirement portion of a buy-sell agreement can usually be taken care of from cash flow within the business or from bank loans. The disability and death provisions of the buy-sell can usually be covered by insurance policies.

There are disability insurance buyout programs available that will provide a periodic payment to the disabled owner so that the new owners can “earn while they learn” without putting too much strain (paying out the disabled owner) on the business.

In some cases, you may want to consider funding a buy-sell agreement with life insurance. Unlike a sinking fund, where time is a problem, life insurance provides the solution from day one.

It also removes the questions of whether or not the company can secure a bank loan at the time of the death of an owner, and whether or not it can afford the note payments. With an insured buy-sell agreement, the company can survive the death of an owner.

Life insurance proceeds are paid, income tax free, to the company. The insurance company gives the money to the estate of the decedent and gets his stock (or partnership interest) in return. The company now has the stock and no inexperienced relatives.

Furthermore, the estate has cash, which it can use to pay estate taxes or any other need. If a permanent type policy is used, values built up over time can be used to fund disability or retirement buy-out provisions.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Randy Neumann, CFP® is a registered representative with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 600 East Crescent Avenue, Suite 104, Upper Saddle River, NJ 07458, 201-291-9000.