Who pays for closing costs when selling a small business? Is it just like a real estate deal? In a previous article, I went into detail about how much it costs to sell a business, but the question remains… So who is responsible for paying these costs?
As a reminder, the cost of selling a business falls into different categories, some of which are not closing costs. One example may be paying off debts that must be satisfied at closing; these are not the buyer’s concern (unless this is part of the deal!). But for this discussion, let’s focus on transaction fees and taxes specifically which are commonly referred to as the closing costs…
So what are the closing costs an owner can expect when a small business is sold, and who pays them?
The good news
In most cases it is the buyer’s attorney who generates the definitive legal document; known as the purchase agreement, and the buyer is normally responsible for the cost. That being said, it’s important for owners to have their own attorney review that document to ensure it’s in their best interest. The owner’s intermediary should also review it, but unless he or she shouldn’t and can’t give legal advice.
That buyer’s attorney also commonly holds the “closing,” which is the final, and most fun step of the transaction, and that cost is commonly also covered by the buyer as well.
All of this being said, sometimes sellers’ attorneys write the purchase agreement and/or hold the closing at their offices. While this could cost more for the seller it could result in better terms for the business owner.
The less good news
In most cases there will be taxes to be pro-rated. Property taxes, ad valorem taxes, and similar assessments that are attached to the business or property and collected by county or state authorities need to be researched and agreed upon ahead of the closing, and will be treated just like taxes in a real estate deal. The business owners selling will pay what’s due for the portion of the year that has passed if the bill hasn’t been paid yet, or may get a credit if they’ve already paid the bill and haven’t utilized the property or space for the full amount of time that has been paid.
The bad news
There are often fees from third parties that the outgoing business owner will be responsible for paying. Specifically assignment fees for franchises and/or leases. The franchisor or landlord looks at the transfer as an inconvenience that will incur legal fees for them, which they always plan to pass on to the seller of the business. These fees, and the official particulars of who is responsible, should be documented in the franchise agreement and the lease document. In the case of a new lease or independent business, no assignment fee will apply.
More good news!
Just because the above “who pays what” are the common ways that deals unfold, doesn’t mean that these are the only way to do deals.
It’s completely within the right of a seller to command that he or she chooses to pay no fees, and shift the burden of fees completely over to the buyer. This can be a negotiation tactic, as all things in life and business are negotiable, but it’s important to recognize that a buyer’s final offer will reflect the total cost of the project, and pushing closing costs into the deal will likely result in a reduced purchase price to compensate for this request.
Knowing what the most probable sales price of a business is through a Broker’s Opinion of Value, and understanding what is common practice for “who pays for what” in a small business deal is always the solution for an owner to know they’re being fairly compensated for their hard work in building a business.
If you have questions about a deal you’re doing, contact me for a confidential conversation and let’s discuss what the best solution may be.
Want to learn more about the closing part of a business transaction? Check out part 6 of my 7 part series “What to expect when selling a business.”