When selling or buying a business, items included in the sale can range from a portion of the business to everything related to the business. Everything is negotiable and neither side should assume a standard or default situation regarding what is or is not included. In certain cases, sellers may be able to exclude aspects of the business with no pushback from most buyers. In other cases, sellers may try to exclude items that will not be acceptable to most buyers.
Whether the sale is an asset sale or stock sale may determine what is or is not included. However, the type of sale does not definitively determine what is or is not included with respect to all assets and liabilities in all cases. Read more about the differences between stock sales and asset sales.
What Can Be Included in the Sale of a Business?
When considering what is included in the sale of a business, we have to consider all assets and liabilities whether they are tangible or intangible.
- Tangible assets include equipment, inventory, real estate, and fixtures.
- Intangible assets include goodwill, patents, trademarks, copyrights and non-compete agreements.
- Tangible liabilities include accounts payables, tax payables (income, sales, other), employee related payables (benefits, payroll taxes, accrued vacation, accrued commissions), accrued expenses, but excluding all amounts owing to financial institutions.
- Very little discussion exists on Intangible liabilities. They may be defined as non‐monetary obligations a company must fulfill in order to avoid the depreciation of its intangible assets including, but not limited to, guarantees of other persons, outstanding letters of credit and similar items, but specifically excluding tenant improvement allowances, leasing commissions, and value of leases.
- Contingent liabilities are a potential liability that depends on a future event, including pending lawsuits, Product Warranties, and exchange rates. There are three GAAP-specified categories of contingent liabilities: probable, possible, and remote.
Buyers must be aware that all of these assets and liabilities may or may not be included in the sale of a business
Are Furniture, Fixtures, and Equipment Included in the Sale of a Business?
Typically all physical assets are included in the sale of a business. This includes furniture, fixtures and equipment (FFE). Inventory is another major physical asset of many businesses that may or may not be included, but is treated separately because of the many forms of inventory and the changing nature of inventory.
Physical assets that are commonly excluded are personal items that do not appear anywhere on the books such as personal tools, and even some items that do appear on the books, such as cell phones and personal vehicles that may be expensed through the business. Ideally, the seller will have all excluded items removed prior to the first buyer visit. The next best option is for the seller to have a candid discussion with the broker and potential buyer that not all assets are included, to develop a list of included assets, and to remove or relocate to a designated area, all items not included prior to due diligence. The asset list typically includes replacement cost for each item. If the buyer is getting a loan, the lender may require an equipment appraisal as part of the business appraisal.
Anything removed after due diligence may cause problems unless there was clear communication and agreement about those items. It is likely the buyer may have taken photos prior to concluding due diligence. Anything not included but remaining on site at closing, even if clearly documented and agreed to be removed at a later date, pose a significant risk to the relationship in the event anything goes missing.
Relocatable businesses are often viewed carefully by the buyer who typically bears the costs of relocating the business. While the buyer may wish to exclude certain assets from the sale, this may cause an issue for the seller unless the seller can derive significant value from the items left behind.
Home office businesses typically do not come with any FFE unless the business utilizes specialized computers, equipment or software at the home office.
Are Vehicles Included in the Sale of a Business?
Fleets of vehicles are essential to the business and are typically included. They should be listed on the asset list with the make, model, year, mileage, year acquired or put in service, and current market value. Trying to exclude any vehicles necessary for the business will raise questions. A clause in the purchase agreement should clearly identify personal vehicles, which may be referenced in financial or other documents, as not included in the sale.
Are Digital Assets Included in the Sale of a Business?
Generally when it comes to websites and social media accounts specific to a business, the answer is yes. If the seller has utilized personal accounts like LinkedIn and personal social media sites to drive business, this is likely to be difficult to transfer despite contributing to the performance of the business. This may result in some tension or a failed deal between the buyer and seller. Business owners should compartmentalize social media and other digital assets to be easily transferable.
Is Intellectual Property Included in the Sale of a Business?
Intellectual property (IP) is typically included in the sale of a business because the buyer wants everything that contributed to the success of the business. This includes, patents, trademarks, copyrights, trade secrets, recipes, formulas, processes, designs and art. Exceptions may include a business that has ceased operations, the site for sale is one of many locations that do the same thing, the IP does not contribute to the business and is parked for future opportunities or is related to a part of the business that both parties have agreed not to transfer. Conversely, IP that was never utilized could be included in the sale in case the new owner can take advantage of an opportunity that the seller did not pursue.
How are Affiliated Businesses and Other Locations Handled In the Sale of a Business?
While it is typically clear what is being offered for sale, it is sometimes unclear how to execute the sale when an owner owns multiple related businesses or locations. Assets that may be shared will be tricky to handle, including intellectual property and even sometimes employees who have responsibilities across locations or affiliated businesses.
Can You Exclude Whole portions, Divisions, or Product Lines When Selling a Business?
This is possible, but not advisable as a general strategy. Buyers have a difficult enough time crossing the finish line with simple businesses. Splitting up portions of a business for sale creates significant uncertainty and risk for potential buyers. Some owners try to carve out a piece of their business for themselves to continue to operate. This sends several red flags to buyers including the potential that the seller will compete with them, or that the seller is simply unloading a non-performing piece of the business. Even if there is logic behind a sale of a portion of the business, the buyer is left to wonder if they are getting everything they need to achieve the numbers presented.
Sellers who plan to sell a portion of their business must have their accounting systems, allocations of costs, and interdivisional transfers separated and cleaned up at least three years before listing that portion of their business for sale. Sellers need to be realistic about how independent and noncompetitive the portion for sale is relative to the portions not for sale.
One owner I met had a successful beauty and skincare salon with over $1M in revenue. She had made a name for herself in the industry and had her own line of products. Along the way, she had developed two websites. Besides over-valuing her business, she had a lot of other challenges related to carving out pieces of the business that were not for sale, including one website, her product line, and even the parameters of a non-compete agreement. This approach to selling a business significantly complicates due diligence and the chance of success. There has to be separate financials for separate parts of business if an owner plans to sell just part of the business. Even then, most buyers would either prefer all or nothing, or another business opportunity altogether with less baggage and strings attached.
Are Employees Included in the Sale of a Business?
Not only are employees included with the sale of a business, sometimes buyers are acquiring companies primarily for the employees. Employees are difficult to hire and train in many industries. Construction and automotive trades have had hiring challenges for years and the COVID pandemic created or exacerbated the same challenges in many other industries.
I had a business owner selling a business with 90 employees and wanted one employee excluded from the sale. The owner concluded that this was just 1 of 90 and should not make much of a difference to the buyer, especially since this employee was part time. The buyer was not amenable to excluding this part-time employee. It is not surprising that buyers want to receive everything that contributes to the results of the business.
Is a Non-Compete Typically Included in the Sale of a Business?
Non-compete agreements are not only common, but predominant in the transfer of businesses, and required if a lender is involved. No buyer wants to invest hundreds of thousands of dollars to compete against the person who sold them their business. Not only does a non-compete agreement or clause have significant value to the buyer, it is also assigned a value for tax purposes.
One owner of a commercial plumbing company with a five person crew approached me about selling his business without a noncompete clause. He was tired of running a company and managing employees, but he struggled with how he was going to continue to earn income. I told him the easiest way to continue in the industry is to move outside of the geographic area defined by a non-compete agreement. Even then, could a buyer trust that he wouldn’t poach his old clients from afar?
Are Licenses Included in the Sale of a Business?
Most licenses are granted to specific people or entities that have earned or qualified for the license. Licenses are typically not included in the sale of a business when they are specific to an individual and non-transferable as dictated by the licensing party. This includes any professional licenses granted by the state to contractors, beauticians, medical and business professionals. Licenses specific to the business, such as liquor licenses, may or may not be included in the sale. Licenses for software, systems or products may or may not be transferable depending on the licensor.
Is an EIN Included with the Sale of a Business?
An EIN, or Employer Identification Number is also known as a Federal Tax Identification Number. In general it cannot be transferred to a new owner, but there are some exceptions per this IRS page including certain percentage ownership changes in a partnership or the surviving corporation uses the existing EIN after a corporate merger.
Are Bank Accounts Included in the Sale of a Business?
Typically, bank accounts do not transfer with the sale of a business The exception is a stock sale where the buyer effectively steps into the shoes of the seller. The banks can facilitate the removal of any owners no longer with the business and the addition of any new owners as account holders and signers on the account.
Is Goodwill Included in the Sale of a Business?
Goodwill is not included in an Asset Liquidation Sale which involves physical assets only. Goodwill is included in the sale of an ongoing business, whether that is done via an asset sale (different than an asset liquidation sale) or a stock sale. Goodwill is an intangible asset. It is everything over and above the physical assets less liabilities and includes the brand, reputation, intellectual property, clientele or customer base, and trained employees.
How is the Price Allocated for Tax Purposes in the Sale of a Business?
Asset allocation is the process by which different types of assets are categorized for tax purposes when a business is sold. The purchase price is allocated to different categories of assets which are taxed differently. The IRS requires that the buyer and seller agree to the allocation, so this is yet another point of agreement in a successful business transfer. Please see these forms and consult with your CPA.
Other Important Items When Considering What is Included in the Sale of a Business
In this article, we discussed tangible and intangible assets and liabilities that may or may not be included in the transfer of a business. We have not discussed some of the most tangible items of value in a business. Read this article to find out who keeps cash, debt, receivables, payables, inventory and working capital in the sale of a business.
Are Debts and Liabilities Included in the Sale of a Business?
Debts and liabilities are typically not included in asset sales and may be included in stock sales. The exception is successor liability which the buyer inherits regardless of how they acquired the business. Read more about the differences between stock sales and asset sales.