After a brief hiatus, welcome back to the unlimited series on the business of blogging where I tackle the business and legal end of blogging. If you are a new reader, please see the resource section of this blog for previous installments. John Chow has started a similar series on blogging income and taxes which is much more specific to his particular situation so please do read his information with that in mind (as a side-note, and this is not a comment on John’s competence as his OWN accountant or the subject matter which he usually writes on, I find it strange that people are asking a stranger like John for specific tax advice even if the summary is excellent. John Chow is a master of making money online. Last I checked, he is not an accountant and he is certainly not his readers’ accountant. Why can’t people pay a modest amount of money to an accountant to save thousands in tax? Seems penny wise, pound foolish to me to try to get specific personal advice from the internet but I digress). The usual disclaimers apply- this post is for information only and not advice and without regard to jurisdiction unless otherwise indicated.
This post was supposed to address how much a blog is worth but I thought I would step back and discuss the process of selling a business/blog in general since it is usually a once in a life-time event for most people (perhaps twice if you are a serial entrepreneur).
THE SHARE SALE
If one’s end goal is to build a blog to sell it then one should ideally incorporate and, when the time is right, sell the shares of the corporation (ownership in a corporation is evidenced by shares). The primary reason is tax driven. In Canada, an individual who sells shares of a qualified corporation is eligible for a life-time capital gains exemption of $750,000. In other words, the first three-quarters of a million in profits is tax free (see here for more details on the lifetime capital gains exemption). Even if you live in a jurisdiction where there is not a capital gains exemption, capital gains tax is generally lower than tax levied on income/interest and, depending on the jurisdiction equal to or lower, than dividend income (speak to a professional about your local tax laws). In other words, a share sale puts the most amount of money in your pocket.
What exactly are you selling when you sell all the shares of the corporation? Everything. Since shares evidence ownership in the corporation the process of selling all your shares means you have sold the corporation and all the assets and liabilities it owns. In the blogging word, this means the domain name, ad revenue, the copyright on the posts- everything.
Purchaser do not like buying shares (as the saying goes: “sell shares, buy assets”). Why? In a share sale, you inherit the liabilities of the corporation. If the corporation owns back-taxes, unpaid employee/contractor wages/pay, contains some libelous comments which may be subject to a future lawsuit, the purchaser inherits it all. Good due diligence and sufficient legal measures (such as obtaining an indemnity from the purchaser) should shield a buyer from most of the “skeletons in the closet” but, frankly, the pain in the butt factor is high to respond to the tax authorities and third parties for something you did not do.
THE ASSET SALE
If the blog is not owned by a corporation or the buyer is a savvy negotiator, you have to sell the assets which compromise of the business of the blog such as the domain name, computer, copyright etc. For the purposes of clarity, it is possible for a corporation to be a “shell corporation” and have no assets in it. Thus, it is possible for a corporation to sell all, or substantially all, of its assets and continue to own the shares which evidence ownership in a corporation- the corporation just happens to own nothing.
An asset sale is more complicated than a share sale because you have to assign a certain tax value to each asset which compromises the blog. For example, if the assets compromising of a blog are sold for $20,000, the domain name could be worth $1,000, the copyright/intellectual property could be worth $5,000, and the ad revenue bought on a dollar for dollar basis for $5,000. In this example, you have only assigned $11,000 of the total purchase price and have $9,000 left over. This excess amount is called “goodwill” in accounting terms. It represents the amount of the purchase price which cannot be directly attributed to assets and liabilities. Goodwill is typically a large component of sales involving technology based businesses (including blogs) since the assets are really not worth much (a two year old router really doesn’t have a lot of market value).
There are two issues which arise from the above paragraph. The first, more relevant issue, is goodwill is taxed unfavorably relative to capital gains. In most jurisdictions, it is taxed as income. Thus, if the value goodwill is quite high, you may push yourself into a higher tax bracket if you sell outside a corporation (the way to mitigate against this is to divide the purchase price between different tax years which gives you tax savings but the advantage is off-set by your additional exposure to non-payment of the remainder of the purchase price). Other jurisdictions limit the amount of goodwill the purchaser can write-off.
Thus, the purchaser may want less goodwill assigned to the purchase price (given it cannot write it off that aggressively) by negotiating a higher tax value to the assets which leads to the 2nd issue. (if this all sounds as clear as mud, it is; preparing a business for sale is a fine art form which is not a DIY adventure because of the tax pitfalls involved) A seller may have to assign tax values to assets which are higher than the depreciation value of the assets which leads to recapture. Recapture is a fancy term which is the difference between the (sale value) – (tax value).
For example, prepare you bought a truck for $100,000 for business purposes. You write off $50,000 of that cost for tax purposes. Thus, in the eyes of the tax authorities, the truck is “worth” $50,000 (tax value and real life values are two different concepts). The truck is then sold for $60,000. Recapture is $60,000 – $50,000 = $10,000 and tax is payable on the recapture amount (based on either the individual or corporate tax rate as applicable).
Having said all of that, the possibility of recapture on selling a blog are quite low. No one really wants to buy your 2 year old Dell Computer; most of the purchase price will be in goodwill. However, I highlight this possibility to show how much more difficult an asset sale is than a share sale. The due diligence and professional work involved in an asset sale is typically more involved than a share sale so, beside the possibility of a higher tax burden, you are paying more in transaction fees.
If your head is spinning reading an asset sale, it highlights the difficult tax and legal issues underpinning an asset sale compared to a share sale and why a share sale is more desired from both a tax and legal perspective.
OTHER THINGS TO CONSIDER
This was a pretty technical post so I wanted to end with a few more general notes:
- Any savvy purchaser will want you to sign a non-competition and non-solicitation agreement. So be prepared to sit on the sidelines for a period of time after sale.
- A business should ideally be prepared for sale months before-hand. This means having an accountant make appropriate tax adjustments, putting verbal contracts into writing, tying up loose ends etc. etc.
- Selling a business is stressful. It requires a great deal of patience and, in every deal involving major dollars, it looks like the deal may fall apart on several occasions. You have to brace yourself emotionally and mentally during the process.
As the above shows, selling a business involves quite a bit of technical legal and tax work. Thus, the first step in selling a business is to see your accountant to put the ship in order. In my next post, we’ll get to the good stuff- how much can you get for selling your blog.