Selling Your Consulting Business
When is a good time to retire from your profitable consulting services business? When you want to. Some consultants will hold off retiring until they are no longer able to work their trade. Others make plans to retire at a specific age, say when they turn sixty-five. Still others give their business ten or twenty years to grow, then sell it and semi-retire or move to a different trade. Some work their children into it, then gradually turn it over to them. A few will sell or give their equity in the business to a more distant relative. Other successful consulting business owners will sell their shares to a partner or to a corporation. Some will sell out to key employees or to competitors.
How much can you get for your business? Of course, much depends on how successful your business is. Once it is established and shows a profit for three years or more, a consulting service will typically be valued at the replacement cost of tangible assets plus 0.75 to 1.25 times gross annual billing.
For example, a successful consulting service billing $500,000 a year from an office with assets valued at $25,000 will typically sell for $400,000 (500,000 × 0.75 + 25,000) to $650,000 (500,000 × 1.25 + 25,000). Quite a range. As it probably took you nine to eighteen months to build your consulting business to a point of profitability, the price should repay you for this lost income as well as the physical assets the business has acquired. How much above or below this guideline you get depends on the value of your business's name in gaining new clients. If your consulting business is on the threshold of expansion, you will get more in the sale than if it is just paying its bills.
You can fund your retirement or future activities by selling your business on a contract. Depending on the buyer, you may want 25 percent down and the balance paid over five to ten years. Or you may opt to take a smaller purchase price and require an annual royalty on gross billings or on net profits. Once your consulting business gets to this point, you'll have a better idea of what you want and how you want it.
What are my options if my business partner dies?
Unless there is a written agreement to the contrary, the death of a partner automatically dissolves the firm. In the absence of such an agreement, surviving partners have no right to buy the deceased's partnership interest. Surviving partners cannot assume the goodwill or take over the assets without consent of the deceased partner's estate.
In selling your consulting business, the paperwork can be simple or complex. In fact, if there is no real estate involved, a handshake can seal the transaction. However, if you are selling a business worth $50,000 or more, you will want a nondisclosure agreement, an offering memorandum, a sales agreement with a noncompetition clause, and maybe a promissory note. Corporate sales will require more paperwork and should involve an attorney.
Nondisclosure Agreement
The first document that potential buyers should sign for you is a nondisclosure agreement. It says they will not disclose or use the proprietary information you supply to them in a way that will harm your business. Otherwise, a potential buyer could learn the valuable information you've developed about the local market and your business operations, then open a consulting service nearby and take your clients.
Generic nondisclosure agreements are available at office supply stores and in books that focus on selling your business. Unless you're knowledgeable in business law, you should have an attorney draw up the nondisclosure agreement or at least review the form you will use.
Offering Memorandum
Your business's offering memorandum outlines what your business is, what it does, how it does it, and the results: profits. It is a summary of how your business works. It's a valuable document that costs you thousands of dollars in efforts to develop. It's the result of your business plan. Don't let anyone see it without signing a nondisclosure agreement first.
A typical offering memorandum for a consulting service will include:
Executive summary
Business description
Business history
Services offered
Sales and marketing procedures
Competition
Operations
Facilities
Personnel
Goodwill
Growth potential
Industry overview
Financial information
Reasons for selling
Price and terms
Contact information
Additional documents, including profit and loss statement and balance sheet, can be provided as the prospective buyer is ready to move to the next level. Most buyers will want an independent audit or verification of the facts before proceeding.
Sales Agreement
The sales agreement outlines how the sale is structured. This can be important not only to the buyer and seller, but also to the tax collector. Yes, you will probably have to pay income tax on the sale of your business. Whether the tax is based on ordinary income or capital gains depends on how the sale is structured and reported. You'll need a tax advisor to help you set up the sale to benefit the seller while meeting the requirements of the buyer.
The typical asset sale agreement will include:
Names of seller(s) and buyer(s)
List of assets being sold by seller
List of liabilities being accepted by buyer
Sale price, typically broken down by type of assets
Value of goodwill; how it is determined
How accounts payable will be paid
Terms of sale: deposit, payment at closing, promissory note (if any)
How seller's debts and obligations will be handled
Seller's representations
Buyer's representations
Covenant not to compete
How disputes will be handled
Governing law
The covenant not to compete typically says that the seller will not start or work for a similar business within a specific geographic area for a specified time. This covenant is not easily enforceable in many jurisdictions if the seller must find employment after the sale.
Promissory Note
In many sales, the buyer has all cash or has financing. In others, the seller agrees to finance a portion of the sale under a promissory note and security agreement. The security agreement says that the business assets — and any buyer assets that are agreed — serve as security for the note. If it is not paid as agreed, the security can be sold to collect the balance.
The promissory note outlines the terms of payments. Equal monthly payments are commonly made over a three- to five-year period at a specified interest rate, often from 8 to 12 percent, until paid off. A large payment during or at the end of the note, called a balloon payment, may be required.
If you are selling your business on a promissory note, it is especially important to have legally binding documents. Use an attorney to draw up all the documents or, at the very least, to review form documents you have drawn up yourself.
You've come full circle, from considering the opportunities of a consulting business to making sure you enjoy it and your new life. Now it is time to take action. If consulting is for you, read this book again and start building your own consulting business, tailored to your skills and goals. Consulting can be a rewarding business for those who sincerely enjoy helping others solve problems.
