How To Sell a Sole Proprietorship: A Guide to Exiting Your Business
Selling a sole proprietorship is different from selling other business entities because of the business structure. As a sole proprietor, you and the business are the same legally. That means you—not your business—own any assets and liabilities, and that affects what you can actually sell.
Can You Sell a Sole Proprietorship?
As a sole proprietor, you can only sell your business’s assets because the business itself isn’t a separate entity like a corporation.
When you sell a corporation, you can sell the whole business, a process called an entity or stock sale. That means you can unload business debts, liabilities, and even underperforming divisions, provided you find a willing buyer.
But you can sell only the assets of a business structured as a sole proprietorship. Buyers can choose which assets they want to buy, and any liabilities, such as outstanding loans, remain with you.
There may also be assignability restrictions on certain assets, such as copyrights, intellectual property, and contracts, and you might need approval from government entities or third parties to sell these assets.
Which Business Assets Can You Sell as a Sole Proprietor?
Business owners of sole proprietorships can sell both tangible and intangible assets. Examples of tangible assets include:
- Inventory and raw materials
- Real estate
- Machinery
- Equipment, such as computers and tools
- Supplies
- Furnishings, such as office furniture
- Software
Examples of intangible assets include:
- Intellectual property
- Brand name and business name
- Reputation
- Customer lists
- Trademarks, copyrights, and patents
- Licenses and permits
- Contracts
When selling a business, it’s important to include all of the assets necessary to run the business. While it might be tempting to keep certain assets if you are planning to open another business, excluding assets essential to running the business can impact the value of your business.
For example, suppose you are selling a restaurant and are planning to open another one, so you decide to hold on to your liquor license for your next venture. Potential buyers aren’t likely to want to go through the time and expense of applying for a new liquor license, and they’ll probably pass on buying your business as a result.
Tax Treatment When Selling a Sole Proprietorship
Calculating taxes on the sale of a sole proprietorship can get complicated. The IRS considers each asset separately, so some assets might be treated as gains, and others might be treated as losses.
As a general rule, asset sales are subject to higher taxes than equity sales because some assets, such as inventory, are taxed as ordinary income rather than capital gains, which have a lower tax rate.
It’s a good idea to consult with a tax professional experienced with mergers and acquisitions. These professionals can use their expertise in asset allocation to reduce your tax liability.
Steps for Selling a Sole Proprietorship
You’ll want to follow many of the same steps when selling a sole proprietorship that you would for selling any other type of business, with a few exceptions.
Decide on the Assets You Are Selling
As the owner of a sole proprietorship, some of your assets likely serve both your business and personal needs. Separate the personal assets you want to retain and list the assets included in the sale, both in the listing information and the purchase agreement.
Get a Business Valuation to Set Your Asking Price
When conducting an asset sale, each asset must be valued separately. A business broker can set values to help you get the best purchase price for your business. Besides the added credibility that comes with a third-party valuation, business brokers can justify your sale price by preparing marketing materials that highlight your business’s strengths.
The value of tangible assets is usually based on comparable market values. Valuing intangible assets, like your company name and reputation, requires knowledge of the marketplace, the industry where you operate, and other factors. A broker or appraiser is best equipped to set values for these types of assets, so you receive the best-selling price.
Many business owners operate their businesses under a DBA, the abbreviation for “doing business as” rather than their own name. Including your DBA in your business valuation is important because it is a key element of customer recognition.
Market Your Business
A business broker can also be a valuable advisor by promoting your business to a large pool of potential buyers. As a business owner, you might know your business better than anyone. Still, a business broker is probably better equipped to prepare marketing materials that show your business in its best light.
Business brokers can market your business to their network of potential buyers in addition to listing it on online marketplaces like BizBuySell and other advertising strategies. They can also qualify potential buyers so you don’t waste time with prospects who won’t be able to close the deal.
Conduct Due Diligence
Once you’ve identified a buyer and negotiated terms, you’ll have to open your books and provide the prospective buyer with your business documents. Having your financial statements, income tax returns, and legal documents ready will help the due diligence process move along more efficiently.
Prepare the Purchase and Sale Agreement
Even if you go through the sales process on your own, it’s a good idea to engage an attorney experienced in mergers and acquisitions to assist with writing the purchase and sale agreement.
As noted earlier, how you allocate the assets included in the sale can have important tax consequences, so you’ll also want to enlist a CPA.
Close the Sale
Unlike the sale of a corporation, when you sell a sole proprietorship, you must transfer the business’s assets into another legal entity. The entity can have any type of business structure, such as an S corp, a limited liability company (LLC), or a general partnership.
Following the transfer, notify the appropriate state agencies of the sale. You also must notify the IRS because your employer identification number (EIN) cannot be transferred. Be sure to close any business bank accounts.
Depending on the new owner’s plans, you might also want to notify customers and vendors of the sale.
Remember that your outstanding business debts remain with you after the sale and should be paid off.
When it comes to how to sell a sole proprietorship, there are key considerations to keep top of mind when selling your business. Working with a team of advisors can help ensure a smooth transaction. From attorneys and appraisers to accountants and business brokers, there are professionals available to guide you through the process. Visit the BizBuySell Broker Directory to find a business broker to help you sell your sole proprietorship.