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A sole proprietorship is a one-person business. In the eyes of the law, there is no distinction between the persona and the business. So, as a sole proprietor, everything you do under your sole proprietorship is attached to you directly.
- A sole proprietorship cannot technically be sold. On the other hand, the assets you own to create and/or run the proprietorship can be sold.
- You will want to work with a lawyer, appraiser, and maybe even a broker to sell your assets.
- The selling process takes time. If you’re looking for a quick way to get cash, selling your sole proprietorship may be the best option.
Can I Sell My Sole Proprietorship?
The short answer is no, you can’t sell a sole proprietorship. Since a sole proprietorship is tied to an individual, it’s technically not a business you can sell to someone else. That being said, the assets of your business can be sold to a separate business owner.
Before you sell them, the person or entity you plan to sell to must have their own business already set up. They can also have a sole proprietorship or a full-fledged small business.
Which Assets Can I Sell?
When you own a business, even a one-person business, your assets are anything that help you conduct business. These assets can refer to physical items, but assets can also be intangible aspects of your business. What your personal sole proprietorship will have for assets largely depends on the type of business you have and the product(s) you sell.
Some examples of tangible assets include:
- Land or lots
- Buildings that you own or lease
- Equipment and machinery
- Inventory (aka the items you sell)
- Raw materials and supplies
Intangible assets can include:
- Brand recognition and reputation
- Brand names and brand logos
- Distribution Rights
How To Value A Sole Proprietorship?
Since your sole proprietorship is made up of your assets, they will determine the value of the sale. In order to find the sale value of your sole proprietorship, add up the value of each of your business’s assets. To do your due diligence, you’ll want to consider two types of assets here:
- Tangible assets. Valuing tangible assets is fairly easy since you can find examples and comps of how much others have sold those assets for.
- Intangible assets. Intangible assets can be more difficult since you’re putting a price on things like brand loyalty, a large customer base, or design elements. It’s not as easy to find comparable prices for assets like these.
If you’re completely lost at this point and have no ideas where to start when it comes to valuing your items, working with an appraiser can help. You can look at the nonprofit organization, the American Society of Appraisers, to find folks in your local area or who are comfortable doing appraisals online.
Another way to value and pitch your assets for sale is to consider your annual revenue as a sole proprietor. You can argue that the new owner of your assets could make a similar income from them. Your annual revenue may be more valuable than the assets themselves, so you can potentially get a higher price with this valuation method.
How To Sell Your Sole Proprietorship - Simple Steps
Selling a small business that is a sole proprietorship is fairly easy, but it is a time-consuming process that may involve working with a lawyer and/or broker. Here are the basic steps, simplified:
- Determine what you’ll sell your sole proprietorship for. Based on the value of the assets themselves or based on what you’ve earned from income because of them, determine your price. You can use a qualified appraiser to get the fair market value of all of your assets.
- Look for a buyer. Looking for the right buyer will be the most time-consuming and the costliest part of the whole process. With tangible assets, it’s fairly easy to list online or in the classifieds. Intangible assets get a bit more complicated. You may want to consider finding a business broker to help you find a pool of buyers
- Once you find a buyer, negotiate, negotiate, negotiate. Never take the first price someone offers. Meet with all potential buyers and show them how you came to the value you did. They’ll want to do their due diligence to make sure what they’re buying is worth it. Explain (and prove) that you took the time and money to obtain and create these assets. Then start negotiating (or have your broker negotiate).
- Consider all offers. If you have multiple offers, evaluate each. When it comes to sole proprietorships, knowing the best offer is simple. It’s usually the one with the highest price tag.
- Create a sales agreement (with or without the help of a lawyer). If you have a relatively simple set of assets, you can probably make up a sales agreement by doing some quick Google searches. For those with more complex assets to sell, get in contact with a lawyer who can help you create the sales agreement. This agreement should include the price you’re selling your assets for, what assets you’re selling, and who you’re selling to.
- Transfer your assets. The last step is to finally transfer ownership of your assets and dissolve your sole proprietorship. For example, you might wish to consider selling intellectual property. Even with the transfer, you’ll still be responsible for any debts or financial obligations your business had, so make sure to take care of those. In addition, you’ll need to send a letter to the IRS with your business info, including your EIN, and the reason you’re closing.
What Happens After The Sale
When you sell any assets, your job isn’t done after the final transfer. After the sale, taxes are due. Since you’re making a profit on your assets, you’ll need to report the capital gains on your personal tax return.
Capital gains tax is calculated as a percentage which is based on the profit you make when you sell an assets or investments. Unfortunately, this tax isn’t a small one. The exact rate you pay will depend on more factors than I have time to explain (so consult a tax expert), but traditionally it’ll be anywhere from 15% - 28% of the spread between sale cost and acquisition prices you paid.
Oh yeah, but this is only for tangible assets. Intangible assets get more complicated and are more difficult to calculate. Again, consider working with a tax professional, since most of us aren’t well-versed in tax rules.
Why Sell A Sole Proprietorship?
Sole proprietors may want to sell their business for a number of reasons. These can be both personal and professional reasons. A few examples include:
- New professional opportunities. Sole proprietorships can be a great starting point for professionals. However, there may come a time when you want to expand your opportunities and you simply outgrow your proprietorship. In that instance, selling the assets in order to focus on new beginnings just makes sense.
- The business has grown. If your assets as a sole proprietor are extremely valuable, selling can make sense since you’ll get a quick influx of cash.
- No interest in continuing. Starting a sole proprietorship is easy, so a young entrepreneur may start a business that they don’t plan to continue with forever. If you have no interest in continuing, selling your assets can help you recoup the costs you spent establishing your business.
- Retirement. If you want to jump-start your retirement, selling your assets could help you do just that. Or, if you can sell for a high enough price, early retirement may be in your future as well.
Tips To Keep In Mind When Selling A Sole Proprietorship
When selling your assets from a sole proprietorship, you want to make sure you fully understand what you’re doing. While you may have the help of a few professionals, consider the following tips before you start the selling process.
- Every item counts. Putting a lump-sum value on your assets without valuing each individually first is a big no-no. You could be losing out on a lot of money by doing this, so make sure to have each asset appraised.
- Prepare early. Selling can take a long time, so you’ll want to start preparing everything you’ll need at least a few months in advance, if not sooner.
- Be prepared to wait to find the right buyer. Taking the first offer you get could end with you losing out on thousands of dollars.
- Work with the right professionals. Working with a lawyer, broker, and appraiser is the only way to know you’re getting an entirely fair offer from buyers. Their job is to understand the market and know the ins and outs of making the right deal. Check out selling a small business checklist for more tips.
Selling a sole proprietorship can be simple or complicated depending on the assets you’re selling and the price you’re selling them for. Understanding the process, knowing who to work with, and knowing the true tax implications of the sale can make the process go smoothly.