Buying & Selling a Business

Why are you selling your business? How many years have you been in business? How many years have you been in business at the present location? Did you create the business or did you buy the business from someone else? Do you have a formal sales agreement prepared that I could have my lawyer look at? Are you a sole proprietorship, partnership or S or C corporation? Do you have tax returns and financial statements that my local CPA can look at? Which bank do you do business with? What types of insurance must your business carry? How many hours did you work per week in your business? How many employees do you have? Do family members work in your business? Will the family members stay after the sale? What type of entity are you? Are you willing to take a note and be paid over time instead of all at once? Will you stay and work for a while after the business is sold? How is inventory controlled? How often do you take a physical inventory?

This ratio illustrates how many times your initial inventory is replaced in a year. Cost of Goods Sold divided by Average Inventory = IT Ratio. Also Days in the year divided by the Inventory Turnover Ratio = Number of days in Inventory Ratio. Faster turnovers are viewed as a positive trend. The result is meaningful only when compared to other business's in the same industry or the same business's past inventory turnover.

This ratio illustrates the average number of days it takes to collect cash from the business's credit sales. Accounts Receivable divided by (Annual Sales divided by 365). The Average Collection Period is meaningful only in relation to the business's credit terms.

The P/E Ratio reflects the amount investors are willing to pay for each dollar of the business's earnings. The higher the P/E Ratio, the greater the investors confidence in the firm. The P/E ratio represents the "multiple" that the stock market places on the earnings of a company. Market price per share of common stock divided by Earnings per share of common stock = P/E Ratio.

The Gross Profit Margin measures the percentage of each sales dollar remaining after the business has paid for its goods. The higher the gross profit margin the better and the lower the relative cost of merchandise sold. Sales minus cost of goods sold divided by sales = Gross Profit Margin.

Any ordinary income as a result of the sale of a business asset must be reported as income in the year of sale regardless of when payment is actually received. If the business sale includes Inventory or Accounts receivables then these assets cannot be part of the installment sale. Speak to your local CPA about your business sale for more details.

You and your local CPA can structure the sale using the installment method. The installment method is a special method of reporting gains from sales of property where at least one payment is received in a tax year after the year of sale. Under the installment method gain from an installment sale is prorated and recognized over the years in which payments are received. The installment gain is reported on IRS Form 6252.

No. You cannot make a tax free "like kind" exchange of goodwill from one business to another.

The cost of business intangibles such as Goodwill, covenants not to compete amounts, trademarks are amortized over a 15 year period. Most intangible assets are expected to benefit more than one year, so their cost is a capital expenditure under Internal Revenue Code section 167 (depreciation), the primary authority for deducting intangibles