It’s reasonable enough that every entrepreneur intends to maximize the startup’s value they have put many resources into while still ensuring that the overall selling costs are at the bare minimum.
Other than understanding the difference between value vs price, unexpected bills and taxes will determine what your net sales proceeds will amount to. In addition, selling your business will most definitely involve intermediaries hence generating additional costs.
It might be impractical to put the finger on the exact closing cost until fully negotiating and finalizing an acquisition. However, being cognizant and informed on what costs to expect will go a long way in ensuring the selling your startup isn’t a gut-wrenching experience.
To avoid any surprises on the closing table and, importantly, avoid paying more than it’s equitable and necessary when selling your startup, the following are several oversights on the typical closing costs you should be knowledgeable of.
Top Closing Costs You Should Be Aware of When Selling Your Startup
1. Taxes
As mentioned, taxes are inevitable in determining your startup’s overall net sales proceeds. However, most entrepreneurs and investors fail to recognize the type of taxes in particular and when to pay them. And there is no doubt that you will need professional enlightenment, especially from a qualified accountant.
Sales and payroll taxes are some of the conventional taxes all business sellers have to settle in a timely fashion before the closing day. What lies at the bottom of your startup’s sales taxes depends mainly on how its equipment has been depreciating. Other taxes you might have to pay to include: personal property and real estate taxes.
The tax side of selling your startup has several moving parts that impact the total tax bill. For instance, asset allocation, the deal structure and corporate stock sales will determine how business sales are taxed.
Also, in some instances, it’s possible to mitigate or even negate transfer taxes depending on how both parties structure the deal. For example, if a corporation acquires another corporation, both parties can finalize the deal by exchanging stocks (tax-free corporate mergers) and avoiding any taxes.
It’s almost impractical to accurately determine these taxes considering that the taxman rules apply differently based on location and various rates. Thus, the most effective way to approach the tax scenario is to sit down and find effective ways to estimate an amount gleaned from the previous year’s taxes.
2. Attorney Fee
Legal services costs are one of the primary expenses required in selling a business. You have to hire a qualified solicitor to cover all details of the deal.
Yes, it might be possible to disregard the services of an attorney when selling your startup. However, don’t overlook the fact that the process may get more detailed and complex. Ultimately, you might have to pay a significant amount to rectify the mistakes or fines you made along the process.
Solicitor fees vary depending on various factors. As you can expect, if the transaction is a bit complex, then there is a high chance the legal cost will likewise be a bit high-end. Also, if the attorney spends more time on the sale, it will likely be more expensive, especially if the solicitor bills you hourly.
3. Business broker commission
Also referred to as intermediary fees, in most cases, they are one of your most significant expenses when selling your startup.
Primarily, an appraiser will ask for an advisory fee to offset the costs of building up data, valuation of your startup and getting it ready for the market. Then, after finalizing the deal, the broker will receive a success fee, mainly as a percentage of the sale price. Or, if it’s a significant transaction, the intermediary fees will be based on a tiered basis.
4. Loan Fees
Loan fees are often a blind spot for many entrepreneurs. During the sale of your startup, you have to settle any existing debt before finalizing the deal. In addition, you have to ensure that you won’t be held accountable for the early payment of the loan.
Generally, commercial real property loans, for instance, open mortgages, have prepayment penalties when you pay all of your loan terms off early. And since you have to settle up any debts before selling your startup, it’s coherent to be hazy on what to do.
The most effective strategy to avoid prepayment penalties is assigning your debt’s outstanding obligation to the prospective startup owners. Then, you can include any prepayment penalties or loans into the sale price.
5. Transfer Fees
Transfer fees are inevitable if a franchise is tied up in the sale arrangements. The transfer fee’s main objective is to cover any additional costs the franchisor might incur due to transferring the franchise.
Purchase costs, inventory, working capital are primarily the typical cost you have to consider when setting up a franchise. In addition, franchise royalties differ depending on the franchisor.
6. Additional Costs
Other costs that should cross your mind include:
- Lien searches, tax certificates, and recording fees- It’s essential to record certain documents that involve the acquisition. Additionally, both parties have to procure specific legal affirmations that all outstanding liens are accounted for.
- Assorted costs and working capital
- Sale of business fee in the lease- It depends on the initial lease you had with the landlord. Some leases include a clause that expects the tenant to pay the landlord a certain percentage upon the sale of the business.
Final thought
Before selling your startup, it’s vital to seek advice from investors and financial advisors. But, most importantly, early prep work goes a long way in ensuring you are aware of all the closing costs you might incur as well as the fees and penalties you can dodge.
