c. Earnings-based valuation. This takes into account historical financial figures, including debt payments, cash flows (past, present and projected) and revenues. Sometimes multipliers of revenues or profits are used; these vary widely from industry to industry. Also, sometimes this is calculated in a return-on-investment appro

2. Confidentiality. The seller should be sure to have all potential buyers sign a confidentiality agreement before providing proprietary information.

3. Listing of Assets and Liabilities.

a. In an asset sale, the assets being purchased obviously must be listed in a sale of assets.

i. A clause merely stating that the sale includes all equipment, furniture and supplies on the premises will inevitably lead to arguments about what was and wasn’t there.

ii. The agreement should also list any liabilities being assumed by the buyer and state that no other liabilities are being assumed.

b. In a sale of stock, the buyer should not merely rely on a review of the seller’s books. It also is not enough to refer generally to the assets listed on the books. Instead, a list of the seller’s assets and liabilities should be created and attached to the agreement.

4. Valuation. Valuing a business is somewhat subjective and is always the subject of negotiations. Valuation methods include:

a. Market-based valuation. This is based on the sale prices of similar businesses in that geographic area. Often business brokers use this method, based on their experiences selling similar businesses in the area. (Business brokers frequently ask for 10%, but like everything else, that is negotiable.)

b. Asset-based valuation. This takes into account figures such as the book value and liquidation value of the business. Still, these are considered bare minimums in business appraisals and are not generally used as the sole path to an asking price.

c. Earnings-based valuation. This takes into account historical financial figures, including debt payments, cash flows (past, present and projected) and revenues. Sometimes multipliers of revenues or profits are used; these vary widely from industry to industry. Also, sometimes this is calculated in a return-on-investment approa

a. In an asset sale, the assets being purchased obviously must be listed in a sale of assets.

i. A clause merely stating that the sale includes all equipment, furniture and supplies on the premises will inevitably lead to arguments about what was and wasn’t there.

ii. The agreement should also list any liabilities being assumed by the buyer and state that no other liabilities are being assumed.

b. In a sale of stock, the buyer should not merely rely on a review of the seller’s books. It also is not enough to refer generally to the assets listed on the books. Instead, a list of the seller’s assets and liabilities should be created and attached to the agreement.

4. Valuation. Valuing a business is somewhat subjective and is always the subject of negotiations. Valuation methods include:

a. Market-based valuation. This is based on the sale prices of similar businesses in that geographic area. Often business brokers use this method, based on their experiences selling similar businesses in the area. (Business brokers frequently ask for 10%, but like everything else, that is negotiable.)

b. Asset-based valuation. This takes into account figures such as the book value and liquidation value of the business. Still, these are considered bare minimums in business appraisals and are not generally used as the sole path to an asking price.

c. Earnings-based valuation. This takes into account historical financial figures, including debt payments, cash flows (past, present and projected) and revenues. Sometimes multipliers of revenues or profits are used; these vary widely from industry to industry. Also, sometimes this is calculated in a return-on-investment appro

b. In a sale of stock, the buyer should not merely rely on a review of the seller’s books. It also is not enough to refer generally to the assets listed on the books. Instead, a list of the seller’s assets and liabilities should be created and attached to the agreement.

4. Valuation. Valuing a business is somewhat subjective and is always the subject of negotiations. Valuation methods include:

a. Market-based valuation. This is based on the sale prices of similar businesses in that geographic area. Often business brokers use this method, based on their experiences selling similar businesses in the area. (Business brokers frequently ask for 10%, but like everything else, that is negotiable.)

b. Asset-based valuation. This takes into account figures such as the book value and liquidation value of the business. Still, these are considered bare minimums in business appraisals and are not generally used as the sole path to an asking price.

c. Earnings-based valuation. This takes into account historical financial figures, including debt payments, cash flows (past, present and projected) and revenues. Sometimes multipliers of revenues or profits are used; these vary widely from industry to industry. Also, sometimes this is calculated in a return-on-investment appro

b. Asset-based valuation. This takes into account figures such as the book value and liquidation value of the business. Still, these are considered bare minimums in business appraisals and are not generally used as the sole path to an asking price.

c. Earnings-based valuation. This takes into account historical financial figures, including debt payments, cash flows (past, present and projected) and revenues. Sometimes multipliers of revenues or profits are used; these vary widely from industry to industry. Also, sometimes this is calculated in a return-on-investment appro

c. Earnings-based valuation. This takes into account historical financial figures, including debt payments, cash flows (past, present and projected) and revenues. Sometimes multipliers of revenues or profits are used; these vary widely from industry to industry. Also, sometimes this is calculated in a return-on-investment approach.

5. Adjustments in Price Based on Performance. In order to limit their risk, buyers may want to include a performance clause in the purchase agreement.

a. Such a clause states that if the business’s revenues drop, there is an adjustment in the promissory note used to pay the remainder of the purchase price.

b. Faced with this, the seller may also want a provision where there is an increase in the amount of the promissory note if the business’s revenues increase.

6. Types of Transactions.

a. Taxable Transactions. In taxable transactions, the seller has to pay income tax to the extent the consideration exceeds the tax basis of the seller’s assets or stock. The buyer benefits from receiving a “stepped-up” (purchase price) basis in the assets or stock acquired.

i. Buyers often want the deal structured as a purchase of assets in order to try to avoid picking up unknown liabilities. (This is not always successful.)

ii. Buyers also prefer a purchase of assets because they don’t want to inherit the seller’s historic low tax basis of the assets (rather than a tax basis equal to the purchase price).

iii. Corporate sellers often want the deal to be a sale of stock, since a sale of assets results in two levels of income tax for the seller: a corporate tax on the transaction and a second tax, if the seller’s corporation is dissolved after the sale, imposed on the shareholders to the extent their portion exceeds their tax basis in the stock.

(1) The sale of assets by an S corporation generally does not result in this double taxation, unless the S corporation was converted from a C corporation within the prior 10 years.

b. Tax-Free Transactions. A “sale” of stock can