How to Sell a Part of Your Business – 5 Steps

Recaps are also a popular choice for business owners nearing retirement but not ready to fully exit. They offer a “double exit” opportunity: an initial partial sale now and a potential majority sale in the future, typically within three to seven years. 

However, selling a percentage stake introduces shared decision-making, requiring alignment between your goals and the new partner’s strategy.

In short, the method you choose to sell part of your business depends on how your business is structured and your long-term goals:

• Asset sales are often the best choice for single entities with integrated divisions or when selling specific assets. 
• Stock sales work best for corporations or subsidiaries that operate as separate entities. 
• Recapitalization is a great way to bring in strategic partners or resources to grow the business or transition ownership gradually without fully stepping away.

Step 2: Ensure the Division Can Operate Independently

Buyers are far more likely to invest in a division that’s already self-sufficient and ready to operate without major adjustments.

If your business is a single entity with integrated divisions, this means separating shared resources—like accounting systems, employees, or facilities—before the sale.  

• Create a stand-alone profit-and-loss (P&L) statement, 
• Assign dedicated staff, 
• Set up independent contact details, such as a phone number and website. 

If the division is already structured as a separate legal entity, such as a subsidiary or LLC, the process is much simpler. You can sell the entity as a whole without needing to divide shared operations. 

However, even with separate legal entities, clean financial records and operational independence make the sale more attractive to buyers

Step 3: Value the Portion of Your Business

Valuation depends on how the division operates within your business:

• For Separate Entities: If you’re selling a subsidiary with its own financial records, assets, and liabilities, use standard valuation methods like multiples of SDE (Seller’s Discretionary Earnings) or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to determine an asking price. 

• For Integrated Divisions: If the division shares resources and expenses with the rest of the business, create a pro forma income statement—to project how the division would perform as a stand-alone operation. 

Creating a pro forma income statement involves making assumptions about revenue, expenses, and shared costs like rent, wages, and insurance to present an accurate financial picture.

Buyers may question these estimates, especially if they think the numbers don’t reflect the division’s true profitability, which can lead to tough negotiations.

In these situations, bringing in financial experts can make all the difference. They’ll create accurate financial statements, back up your assumptions with solid data, and make your business more appealing to buyers, ensuring a smoother sale process.

Step 4: Plan for Taxes and Legal Implications

Tax implications vary by sale type:

• Asset Sales:  Buyers can select specific assets and avoid inheriting liabilities with this type of sale, so they’ll most likely choose it. However, for you, the tax implications are more complex, as the proceeds are taxed differently depending on the type of asset sold. 

For example, capital gains tax typically applies to assets like goodwill or equipment when sold for more than their original cost basis, while the higher ordinary income tax may apply to items like inventory or accounts receivable. As a result, asset sales can create a higher overall tax burden for sellers compared to stock sales.

• Stock Sales: Stock sales are generally simpler for sellers as they treat the proceeds from these sales as capital gains, calculated by subtracting the original cost basis of the shares from the sale price. This often results in a lower tax rate compared to asset sales, where some proceeds may be taxed as ordinary income.

However, buyers may approach stock sales cautiously because they inherit not only the assets but also all existing liabilities, including any undisclosed risks tied to the entity. For this reason, thorough due diligence is critical to evaluate the entity’s financial and legal position.

Step 5: Finalize the Sale

Execute the appropriate agreement to complete the transaction: 

• For an asset sale, draft and sign an Asset Purchase Agreement (APA). Clearly define the assets being transferred, the terms of the sale, and any conditions. Then, use a bill of sale to officially transfer ownership and close the deal.
• For a stock sale, prepare a Stock Purchase Agreement (SPA) to outline the terms and transfer the shares. Address key details such as liabilities, warranties, and indemnities to protect all parties involved.
• In the case of a recapitalization, draft agreements to define the ownership percentage, investor rights, and restrictions for new shares. For existing shares, specify the sale terms, including price and ownership rights.

In all three cases, it’s important to work with legal and financial experts to structure the agreements properly and align them with your goals.