Question: My boss wants to retire and offered to sell me his business. I don't know how much it's worth, and I doubt I'd even have the money to pay for it. Any advice?
Answer: Unlike large public companies with many shareholders, your boss's business isn't likely to attract many buyers, so you are in a good position to get a relatively low price without a lot down. There's no firm rule for valuing private companies, so your boss may be willing to sell for some multiple of his annual earnings (say, three to five times the company's bottom line). If you can't get a bank loan, ask your boss if you can finance the purchase out of profits on a schedule that doesn't pinch the company's cash flow, says Joseph Fulvio, a management consultant for startups and emerging businesses. Another option: Ask your boss to "hold paper," lending you the balance over a fixed number of years at a set interest rate.
Make sure you consider tax consequences. "A sale of shares or a third-party brokered sale results in a capital gain for the seller, whereas interest income paid on a loan made by the current owner is treated differently," says Fulvio. "The same goes for buyers with a loan on the books vs. some other form of payout, like a profit-sharing agreement." So, consult an accountant or tax attorney.
Rosalind Resnick is founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and small businesses, and author of Getting Rich Without Going Broke: How to Use Luck, Logic and Leverage to Build Your Own Successful Business. Reach her at firstname.lastname@example.org or through her website, abcbizhelp.com.
For reprints and licensing questions, click here.