This is probably the most asked question when I meet with a business owner thinking of selling their business. It’s a good question. What is being sold, or included in the sale price, depends on how the business is being marketed. However, there are some things that can be said about what is usually included in the sale of a business.
First, the seller is typically selling the assets of the business, not the corporate entity. The primary reason is to avoid potential liability, by the buyer, for the actions of the seller’s corporation before the business was sold. In addition, in an asset sale, the buyer and seller can agree to a price for the assets of the business that is above book value. This would allow the buyer to use depreciation to write off the purchase faster.
What is included in an asset sale of a business?
The furniture, fixtures, and equipment used in the business are normally included in the sale price of the business. It is usual that these assets are transferred to the buyer free and clear of any debt. It is common that loans on equipment or vehicles are paid off at the closing of the sale of the business from the sale proceeds. Personal assets that are owned by the business, but not necessary, for its operation, are usually excluded from the assets sold. The seller should not include these in any lists of assets given to the buyer and make it clear to a buyer what personal assets are not included in the sale of the business.
Where the sale of businesses can differ is in the treatment of working capital. Normally, a business owner keeps the cash and cash equivalents – such as money in bonds or a money market fund. Accounts receivable can be included in the business sale. It is usually not included in the advertised price. It is generally to the benefit of the buyer and seller for the buyer to buy accounts receivable. It makes for a smoother transition for the customers and spares the seller from pursuing the accounts after the sale. A buyer usually prefers to pursue the slow paying accounts rather than having the seller do it after the sale of the business.
Inventory is a large part of the assets for many businesses. Again, it may or may not be included in the advertised price. In a business that carries inventory, it is common for a normal inventory level to be included in the agreed upon price. On the day of the closing, an actual inventory is taken and the sale price is adjusted, up or down, from the amount included in the sale price. In some businesses that work on the inventory, such as a manufacturing business, there will be inventory that is not finished on the day of the sale. The buyer and seller need to analyze this work in process and agree on a price for it. They do so on the day of the closing.
In some business sales, particularly larger ones, the parties agree on a figure for net working capital, rather than agreeing on how each component of working capital will be handled in the sale. Net working capital is usually defined as current assets, excluding cash and cash equivalents, less current liabilities, excluding amounts due on funded indebtedness (term loans). At the closing, the sale price is adjusted based on the difference in net working capital from the agreed upon value.
There are no standard rules for what assets are included, or not included, in the sale of a business. When selling, or buying, a business, be sure you are clear about what assets are included in the price.