Writing · What it costs

The cost of selling a Texas business.

Most owners have a number in their head for what the business is worth. Almost nobody has a number for what it costs to turn that into money in the bank. Here is the whole stack on a $2M sale.

The deal below is a Texas service business. Sale price $2,000,000. Leased shop, so no real estate. About $450,000 of equipment, of which $250,000 is titled trucks. Buyer using an SBA loan, which is what most of them use.

Every figure comes from a published rate schedule or a published fee survey. Rates move, and I re-check them every October.

The broker takes $180,000

Ten percent of the first million, eight percent of the second. That is the standard for a deal this size, and it is most of what you will pay.

Two mechanics inside that fee are worth more attention than the percentage.

The up-front fee. Expect $15,000 at this size, paid when you sign. It is usually credited against the commission — but the commission only exists if the deal closes. No close, no credit, money gone. At the odds for a business this size, that is the likely outcome and not the odd case.

The tail. After the agreement ends, you still owe the full commission on any buyer the broker introduced who closes later. Six months to two years, and 12 months is standard. Negotiate it to six months, and require a written list of named buyers when the agreement ends. Without the list, the tail is whoever he says it is.

The rest of the professionals take about $57,500

With the broker, that is $237,500 before a dollar of tax. About 12% of the price.

Then the two nobody warns you about

Stay bonuses. The buyer needs your key people to stay. That runs about 25% of base pay for key salaried staff and 30% for senior people, paid out over six to twelve months after closing. On this deal, call it $65,000. Sellers usually fund these out of the proceeds, because it lowers the risk the buyer is taking and it holds the deal together.

Insurance run-off. Your claims-made policies stop protecting you when they end, so you buy extra time. One year costs 125% of your expiring annual premium. Three years costs 225%. Five years costs 300%. None of it is refundable. On this deal, three years is about $20,250.

Read your declarations page before you budget this. Contractors' general liability is usually written on an occurrence basis and needs no tail at all. The tail matters for professional liability, employment practices, directors and officers, and pollution coverage.

All in, seller cost is $322,750 — 16.1% of the price.

And then the tax

Texas takes nothing. There is no personal income tax on the gain, and Proposition 4 in 2019 put that prohibition in the state constitution.

Federal is the big one and it depends entirely on how the price is split between assets. Equipment recapture and a non-compete payment are ordinary income, up to 37%. Goodwill is long-term capital gain, at 15% or 20%. On a deal shaped like this one, federal tax lands around 21.6% of the price — about $432,000 — and it moves four points either way on the equipment-versus-goodwill split. That split is a conversation with your CPA, and it is worth having before the purchase agreement is drafted rather than after.

What you actually keep

The intermediary is 62% to 76% of everything you pay. Every lawyer, accountant, appraiser and filing fee combined is 3% to 4% of the price.

That is the line worth remembering, because it tells you where negotiating is worth your time. Arguing over a $4,500 books cleanup is not it. The commission and the tail clause are.

The two Texas items that ambush this deal

Your trucks get taxed at 6.25%

Texas exempts the sale of a business's whole operating assets from sales tax, so tools, inventory and shop equipment come across clean. That is Tax Code section 151.304.

Titled vehicles are different. They fall under Chapter 152, and the Comptroller says plainly that motor vehicle tax law provides no occasional-sale exemption. So 6.25% of the price of the trucks, due within 30 days. Late by 1 to 30 days is a 5% penalty; beyond that it is 10%. On $250,000 of titled trucks, that is $15,625.

Mergers and entity conversions are exempt. Asset sales are not, and most small deals are asset sales. For an HVAC, plumbing, electrical or trucking company this is the largest forgotten line on the page. It falls on the buyer, which means it comes out of your price.

Form 86-114 is free and it can hold your closing 90 days

Under section 111.020, a buyer has to hold back enough of the price to cover any unpaid state tax you owe — unless you both get a Certificate of No Tax Due. A buyer who closes without one is liable for your unpaid taxes up to the purchase price, including debt he assumed. His attorney knows this, which is why he will insist.

The form is 86-114. It costs nothing. It needs both signatures. It usually takes about ten business days — and up to 90 if the Comptroller decides to audit you.

Request it the day the letter of intent is signed. A 90-day hold discovered in week eight kills the buyer's rate lock, and then it kills the buyer.

The buyer's side, because it comes out of your price anyway

Both sides together, $439,200 — 22% of the price spent on getting the deal done.

One exception worth knowing if you own a machine shop. Manufacturers in the NAICS 31 to 33 codes pay a zero guaranty fee on loans of $950,000 or less. Many oilfield fabricators and machine shops qualify. That is roughly a $26,000 swing against a plumbing company at the same price, and it is worth structuring around.

What a failed attempt costs

Plus a 12-month tail on every buyer the broker introduced. Plus about 106 days of exclusivity spent on a sale instead of on your business. Plus every buyer in your market now knows the company was for sale and did not sell.

Where I fit

I am not a broker. I do not list businesses, I do not find buyers, and I never take a commission, a success fee, or anything that depends on whether you sell. I get paid the same whether you sell next year, in ten years, or hand it to your daughter.

The Groundwork is $10,000 to $15,000, once. The Overhaul is $2,500 a month, cancel any time. Two years of that plus a $12,500 Groundwork is $72,500 — about 3.6% of a $2M sale, and about 40% of what the broker takes.

The difference is what the money buys. The broker's fee is spent finding a buyer for whatever you have. Mine is spent making sure there is something worth buying, and making the cashflow better while we do it — which is the part that pays for itself before any sale happens.

I do not give legal, tax or valuation advice, and I do not provide a valuation of record. Your attorney, your CPA and a certified appraiser do that work, and I will tell you when it is time to call them. No guarantees about outcomes — nobody honest gives you those. Rate schedules re-checked each October.