How to Sell a Sole Proprietorship
Wondering how to sell a sole proprietorship? Selling a sole proprietorship can be even more complicated than the initial setup.4 min read
2. What Can a Sole Proprietorship Sell or Transfer?
3. Steps in Selling a Sole Proprietorship
Updated November 9, 2020:
Wondering how to sell a sole proprietorship? Selling a sole proprietorship can be even more complicated than the initial setup. A sole proprietor owns all of the assets of the business and is personally responsible for the debts of the business.
How To Sell a Sole Proprietorship
A sole proprietorship is an extension of the owner and is not considered as a separate identity. This allows the sole proprietor to sell his 100 percent stake in the business in one bulk transaction. First-time business owners usually structure their business as a sole proprietorship because it's the simplest way to start a business.
Legally, there are very few requirements when creating or selling a sole proprietorship. A sole proprietorship was designed to have only one owner. Therefore, when the owner dies or the business is sold, the structure automatically dissolves.
A sole proprietorship cannot be transferred to another party. However, it may able to have its assets transferred to a new owner. The new business owner must have his own separate legal business structure in order to receive the assets. Once the assets have been transferred, the selling of the sole proprietorship is a relatively quick and easy process.
The moment an individual starts a business it's automatically structured as a sole proprietorship. The liabilities and assets are normally held in the business owner's name, not under the name of the sole proprietorship. When a sole proprietorship dissolves by selling its assets, the new owner of the assets must create a new business structure to house the assets. In other words, a totally different company must receive the assets.
There's not a separate legal entity created when a sole proprietorship is formed. The owner of the business is responsible for the actions and liabilities of the company. Despite all legal responsibility being put on the owner, the name of the business doesn't need to be the legal name of the owner. The business may have its own name. This is referred to as the "Doing Business As," or DBA.
The DBA name is how the business will be marketed for advertising and commercial purposes. The business owner will be responsible for all liabilities and actions that take place while doing business under the DBA name.
What Can a Sole Proprietorship Sell or Transfer?
The debts and legal obligations that the owner has undertaken cannot be transferred to anyone else and must remain with them throughout the process of transferring the assets of the business. Intangible and tangible assets may be transferred to the new owner. The assets can be transferred to any other business entity type, such as an LLC or corporation, just as long as it's a unique business structure.
Once the business structure has been established, the sales transaction for the transfer of assets may begin. Tangible assets may include:
Intangible assets may include:
- Intellectual property rights
- Brand names
In order to receive the most for your business, it's important to sell all of the components that make up your business, including both tangible and intangible assets.
Steps in Selling a Sole Proprietorship
The following steps should be taken in order to sell a sole proprietorship:
- Determine the selling price.
- Estimate the total value of the business based on forward earnings.
- Retain the services of a qualified appraiser to determine the fair market value of the business, including the equipment and inventory.
- Find a buyer.
- Retain the services of a business broker to assist in finding a buyer.
- Advertise the business in the local classified, online, or in related trade publications.
- Prepare a marketing brochure for potential buyers highlighting the strengths and financials of the business.
- Negotiate with potential buyers.
- Hold meetings with potential buyers to negotiate terms.
- Reinforce to potential buyers how the valuation of the business was determined.
- Explain that a sole proprietorship is easily transferable.
- Review offers.
- Select the best option based on total price and lump-sum payments.
- Create a sales agreement.
- A qualified lawyer may assist in creating a sales agreement.
- The agreement should include the sale price, what assets are being transferred, and the intent of the buyer in purchasing the business.
- Transfer assets.
- Upon completion of the sales agreement, the assets of the sole proprietorship may be transferred to the new owner.
- The seller is still responsible for the business' debts and obligations.
- The seller should contact their local secretary of state and inform them about the sale of the business.
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