Insights
Selling Part of Your Business as a Restructuring Strategy
By Melody Yuan
How selling certain portions and assets of your business can be part of your strategy to save it
Cash is a lifeline. But with the prolonged pandemic, lower overall consumer spending and lack of federal funding, many businesses are struggling to maintain cash flow and keep their doors open. A September report by Yelp found that 60% of businesses that closed due to COVID-19 have now closed permanently. Data suggests that in the U.S., almost a quarter of all small businesses remain closed, the World Economic Forum reports.
“I know it’s hard, in this time of COVID-19 with the landscape constantly changing, to figure out what your business is worth,” said Felicia Vallera, founder and director of the San Francisco Community Business Law Center, in a webinar. “If you’re able to have a comprehensive tax analysis, cash flow forecasts for several different scenarios, and actually do a formal business valuation, you might be able to restructure your business effectively and keep going.”
If your business is struggling to reopen or remain open, you may want to consider selling a portion of your business as a strategy. Selling may bring in much needed cash to enable operations, provide access to resources, or reduce financial risk. Whatever the reason, here are some of the things to consider when selling your business as part of a restructuring strategy.
An honest look at why you want to sell
Typically, a business owner has carefully considered their business model and gone through an exhaustive list of other funding alternatives before they decide to sell any business assets, a portion of or even their whole business. “You want to be constantly reevaluating your business environment and looking at the different relief measures, funding availabilities and special programs because there can be a lot that’s still coming down the pipeline,” says Vallera.
Re-negotiating contracts to buy time and save money is a great way to maintain cash flow. “It’s better if the pandemic isn’t the driving force for your decision to sell,” says William Blumberg, vice president of Prime Investments. “If your business wasn’t too seriously impacted by the pandemic, it’s a great time to sell. If your business was affected by the pandemic and you have the will and the energy, you might want to re-invest and rebuild that business before putting it on the market.”
It’s not uncommon for businesses to sell off assets that are no longer viable as part of their pivot and restructuring plan. “Say you’re a restaurant and you’ve pivoted to a takeout and delivery model during COVID-19,” says Vallera. “You no longer need a lot of furnishings for a sit-down dining room, and if you’ve pivoted entirely to takeout, you can sell part of your business property or the assets, along with the associated liabilities.”
What to prepare
When looking at selling a part or the whole business, business owners must make sure that they are caught up on their bookkeeping, records, taxes and business licenses. “You want to have something that’s packaged to present your business to third parties if you need to,” says Vallera.
When it comes to selling, both Vallera and Blumberg agree that preparation is the key to a successful sale. “You need to first assess the fair market value of your business before putting it on the market,” says Blumberg, which means getting an objective valuation from a business appraiser.
“Many good accounting firms can do a decent valuation for a fraction of the price of an appraiser, as long as you have all your accounting and banking records up to date,” says Vallera.
The market will calculate the value of a business by looking at the earnings before interest, depreciation, taxes and amortization (EBIDTA) and an adjusted EBIDTA, then compare those numbers to other factors, such as the industry, business size, customer base, market competition, economic trends, etc.
“You’re going to have to do your due diligence, which involves audit inspections, putting your legal documents in order, and having all your records organized in a presentable and chronological manner for any potentially interested buyer or investor,” says Vallera. “But you also want to have a process thought out about how you’re going to qualify prospective buyers before you start spending a lot of time talking to them.”
To ensure that the other party is a suitable candidate, you must submit a letter of intent. “Letters of intent are typically a combination of binding and non-binding expressions of intent,” continues Vallera. “Before you let anybody in to start looking at your business, you need to be sure that they’ve signed something that imposes an obligation for them to keep what they’re looking at confidential.”
“Before you let anybody in to start looking at your business, you need to be sure that they’ve signed something that imposes an obligation for them to keep what they’re looking at confidential.”
A letter of intent protects the seller by ensuring proprietary rights of a business and prohibits anyone from stealing the business model or idea shared with the other party. “Imagine how angry you’d be if someone ripped off your idea that you’d spent years developing, and then they decline your business offer and go off to start their own business, taking everything they’ve learned by checking you out. You have to protect yourself against that in writing,” says Vallera.
The process of selling
Once the letter of intent has been signed and careful due diligence has been done, the seller and the buyer can negotiate and eventually sign a purchase agreement or an asset purchase agreement. “Check out the buyer to make sure they are who they say they are,” says Vallera. “Make sure they’ve got the funding to complete the transaction. It’s important that you feel confident in all of this.”
When it comes to writing out the purchase agreement, listing out the details of what is included and what is excluded will help clarify the transaction. “You want language in the agreement that either gives the buyer assurances about the condition with a warranty, or lets them know that there is no assurance about the condition and that they’re buying it as is. If they’re buying the whole business, then it may be an equity sale or purchase,” says Vallera.
There are generally two different types of selling methods. An asset sale allows for the buyer to pick various assets and components they want from the business. An equity sale, on the other hand, usually means that the buyer will inherit all aspects of the business, which includes things such as employees and any liabilities.
There are many different tax implications, depending on the type of transaction. “If you’re doing any significant asset sale or an equity sale, you should consult with a tax professional to understand what it means to sell according to the terms and conditions that the buyer wants,” says Vallera.
While it may be difficult to accept that you will no longer have sole proprietorship over your business, keeping your eye on the long-term goal will help you get through this hardship. “The upside of selling is that it frees you from all the old problems, it leaves your reputation intact, including your credit rating, and it reduces your financial risk significantly,” says Vallera.
She encourages business owners to look at this as a liberating way to move forward. “The process will be difficult,” she says, “but you may come out ahead in the long-run.”