While the Limited Liability Company and Subchapter S corporation have become popular forms of small business organization, the sole proprietorship remains the entity of choice for many individual businesspeople. Although a sole proprietorship is an unincorporated entity with no legal existence separate from that of its owner, it can still be sold. Buyers and sellers of sole proprietorships, however, should take several issues into account before completing the sale and ensure that these areas are covered in the sale contract.
One of the main things a person is purchasing in a sole proprietorship sale is the name of the business. Depending on how long an operation has been in business and the efforts the owner invested in marketing his business over the years, a sole proprietorship could have considerable brand equity. The goodwill associated with the sole proprietorship's established name is an asset that can be expected to continue to generate revenue for the new owner.
Depending on the nature of the business, the location from which it operates may be even more important than the name. While the goodwill associated with a name is invaluable to service operations such as plumbing, painting or roofing companies, location is key for businesses such as convenience stores, coffee shops and gas stations. If a business has an established clientele used to stopping at a given place for a given need, that stream of business can be expected to continue in the future and has real value even though neither party can guarantee it will continue into the future.
While the debts associated with a sole proprietorship will generally be in the name of or personally guaranteed by the owner and therefore nontransferable without the consent of the creditor, real and intangible assets of a sole proprietorship can be transferred and considered part of the purchase price. Inventory, equipment, land, vehicles and receivables -- accounts owed to the business -- are all items that can be sold along with a sole proprietorship. When a sale of a sole proprietorship is financed, the seller retains a security interest in certain assets of the company that he transfers to the buyer. These secured transactions are subject to highly technical rules and should not be attempted without the assistance of a lawyer.
Agreement Not to Compete
Although the business name, location and assets are all critical part of the transaction, a substantial part of the goodwill in any business is that associated with the seller. One thing a buyer never wants to see happen is to invest money in buying a business only to see the seller open up another business just like it across the street and draw away all the clients. For this reason, business sale contracts often contain non-compete provisions. If legal for the business in question and reasonable in scope, duration and geographic area, these provisions can ease buyer concerns and make the sale of a sole proprietorship possible.