Selling your business is a monumental decision that requires careful planning and forethought. You’ve worked hard to build your company, and when the time comes to sell, you want to do it right. If you’re a Texas business owner, you’ll not only face the usual considerations of any business sale, but also some Texas-specific legal and tax factors.
The good news is that Texas offers a very business-friendly environment (including no state income tax), but you still need to navigate the process wisely. Below, we break down key things to consider before you put your Texas business on the market.
Getting Your Business Financially Fit For A Sale
Before listing your business for sale, take time to get your books and records in order. Prospective buyers will want to comb through at least the past 2–3 years of financial statements, tax returns, and operational records. Clean, accurate financials build trust and can even boost your business’s value. Work with your accountant to ensure statements are up-to-date and reflective of reality. If you have any commingling of personal and business expenses, now is the time to separate those and present a clear picture of profitability. Also, take time to assess your business’s market value. Consider getting a professional valuation or consulting a broker to determine a realistic asking price based on your financial performance and assets.
It’s also wise to address any outstanding liabilities or compliance issues. Ensure you’ve filed all required Texas state reports and paid all your business taxes (pay particular attention to payroll taxes, sales taxes, and the Texas franchise tax). In Texas, a buyer can even be held liable for the seller’s unpaid business taxes if proper precautions aren’t taken.
That’s why buyers will usually request a Texas Certificate of No Tax Due from the Comptroller to confirm all taxes are paid. (Even with this certificate, you as the seller remain responsible for any taxes owed before the sale.) Being proactive on taxes and compliance will make the sale process smoother and give the buyer confidence. It also protects you from last-minute surprises.
Operationally, take a critical look at your business’s “curb appeal.” Just as you might spruce up a house before selling, you want your business to look its best to buyers. This could include tidying up physical locations, resolving any pending legal disputes, and streamlining operations so that a new owner can step in easily. Organize important documents (corporate records, major contracts, employee records, etc.) so they are readily available for review. The easier you make it for a buyer to evaluate your business, the more positively they’ll view the opportunity.
Decide on the Right Deal Structure (Asset Sale vs. Entity Sale)
An important consideration is how the sale is structured – whether you sell your company’s assets or sell the business entity (stock or ownership interest). In an asset sale, you transfer individual assets of the business (equipment, inventory, goodwill, etc.) to the buyer, whereas in an entity (stock) sale, the buyer takes over your ownership shares and essentially steps into your shoes as owner of the company.
For pass-through entities (e.g. LLCs, S-corps, partnerships), an asset sale or entity sale will generally have similar tax results (one level of tax on the owners). However, if your company is a C-corporation, an asset sale can trigger double taxation – the corporation pays tax on its gain, and then you pay tax again on the distribution of proceeds. This combined tax can drastically reduce your net from the sale. By contrast, selling the stock of a C-corp avoids the corporate tax and only incurs tax on your capital gain, eliminating that double-tax issue.
Naturally, sellers usually favor a stock (entity) sale for simplicity and tax reasons, while buyers often prefer an asset purchase to gain tax benefits (like a higher depreciation basis) and to avoid unknown liabilities. The deal structure is often a major point of negotiation, and the final agreement may require some compromise. It’s wise to discuss the options with your attorney and tax advisor early on so you understand the implications of each approach and can plan accordingly.
Understand the Tax Implications Of Selling A Business
Selling a business can trigger significant tax consequences, so early tax planning is crucial. Long-term capital gains (usually taxed at 15% or 20% federally) will apply to your profit. For instance, in California a business seller might owe around 13% of their gain in state tax whereas in Texas you owe no state income tax on the sale at all. This lack of state tax is a big advantage for Texas business owners. (If you’re selling a Texas business but live out of state, be aware that your home state’s taxes could still apply.)
While Texas doesn’t tax your income, be mindful of other taxes. Texas levies a franchise tax on many businesses – essentially a small percentage of your business’s revenue over a certain threshold. Make sure you’ve taken care of any franchise tax obligations before selling. Additionally, consider sales tax. Normally, selling tangible business assets would be subject to sales tax. However, Texas law provides an occasional sale exemption that often covers the one-time sale of an entire business’s assets. In plain terms, if you sell all or substantially all of your operating assets to one buyer as a single package, you likely won’t owe Texas sales tax on that transfer. (If you sell assets off piece by piece or to multiple buyers, the exemption might not apply.) It’s yet another reason most owners prefer to sell the business as a whole rather than breaking it up.
To avoid any unwelcome surprises, it’s wise to consult your CPA about strategies to manage the tax hit. A knowledgeable tax advisor can help you time the sale or structure payments (for example, installment payments) in a tax-efficient way and ensure you take advantage of any applicable exemptions or deferrals.
Legal Preparations For A Business Sale
Also consider some legal details well before closing. If you have business partners, check your partnership agreement or corporate bylaws for any restrictions on selling (co-owners might need to approve a sale, for instance).
If you’re married, remember Texas is a community property state – your spouse may have a legal claim in the business and might need to sign off on the sale. Review key contracts (like leases, franchise agreements, or client contracts) to see if they require consent or notice before you transfer them to a buyer. And if your business requires special licenses or permits (for example, a liquor license), find out how those will be handled – many permits aren’t directly transferable, so the buyer may need to apply for their own.
Most buyers will also insist on certain conditions to protect their investment. For example, you will likely be asked to sign a non-compete agreement (agreeing not to start a similar business or lure away customers for a certain period after the sale). Texas generally allows such agreements when tied to the sale of a business, as long as they’re reasonable in time and area. You might also have to agree not to solicit your former employees or customers for some time. These terms are normal – just make sure you understand them and that they are reasonable. Having a lawyer review these provisions is important to protect your interests.
Finding a Buyer For Your Business and Closing the Deal
Finding a serious buyer may take time. You might work with a broker and should use a non-disclosure agreement (NDA) to protect sensitive information during discussions. Once a buyer is interested, be prepared for due diligence – they will thoroughly review your finances, contracts, and operations. If all goes well, you will negotiate and sign a formal purchase agreement detailing the terms of the sale. Finally, at closing, all the documents are signed and ownership officially transfers (the buyer pays you and you hand over the business).
After the sale, be sure to formally close your business’s tax accounts with the state now that you’re no longer running the business. The Texas Comptroller’s office provides an online system to close out your sales tax permit and other tax accounts when you sell or end your business. This step will stop future tax filing requirements and signals to the state that you’ve ceased operations under that taxpayer number.
Selling your business is a journey that involves legal, financial, and emotional challenges. By understanding these considerations and planning ahead, you can make the journey as rewarding as the destination – a successful sale and the start of your next chapter.
Thinking about selling your Texas business? The process may seem overwhelming, but you don’t have to navigate it alone. Our experienced Texas business law team is here to help you at every step, from initial planning and valuation to the final closing paperwork. We pride ourselves on making complex transactions understandable and successful for our clients. Contact us today to discuss your goals and how we can help you achieve a smooth and profitable sale.