A sole proprietorship is the simplest form of business structure, owned and operated by a single individual. It’s not a separate legal entity from its owner, which means the owner is personally liable for the business’s debts and obligations. This type of business is often preferred for its simplicity and ease of setup.

Considerations when selling a sole proprietorship

To start, assess the business value by preparing accurate financial statements, including profit and loss statements, balance sheets, and tax returns. This documentation will help determine the business’s worth. Evaluate all assets, such as equipment and inventory, alongside liabilities like debts and leases. It’s also important to consider current market conditions and industry trends that may affect the business’s value.

Next, prepare for the sale by gathering all necessary legal documents, including business licenses and contracts. Create a detailed overview of business operations, highlighting key processes, customer lists, and employee information. Hiring a professional appraiser or business broker can be beneficial for an accurate valuation.

When it comes to marketing the business, decide how much information to disclose and consider using non-disclosure agreements to protect sensitive information. Identify potential buyers, which may include competitors or investors, and utilize business-for-sale websites and local networks for advertising.

Once interested buyers emerge, be prepared to negotiate terms such as price, payment structure, and transition periods. Engaging a lawyer to draft or review the sale agreement ensures that all terms are clear and legally binding. Additionally, develop a transition plan to facilitate a smooth handover of operations and customer relationships.

Considerations when buying a sole proprietorship

Buying a sole proprietorship is possible, but it often requires convincing the seller, as many are family-owned or generational businesses. It’s important to carefully evaluate several key factors to determine if this is a wise investment and to facilitate a smooth transaction.

For prospective buyers, the first step is to evaluate the opportunity by reviewing the business’s financial health through its statements and records. Understanding the reason behind the sale can provide insights into potential issues or opportunities. Assess how well the business aligns with your skills and long-term goals.

Conducting thorough due diligence is crucial. Examine financial documents to verify the business’s performance and identify any red flags, and ensure there are no outstanding legal issues or liabilities. Evaluating operational aspects, including staff and the customer base, will help you understand how the business functions.

Securing financing is the next step, whether through personal savings, loans, or investor capital. Prepare financial projections to demonstrate your plans for managing and growing the business after purchase.

When negotiating and closing the deal, make an offer based on your assessment and be ready to discuss terms with the seller. Having a lawyer review the purchase agreement is essential to ensure that all terms are favorable and clear. Finalize the transaction by completing the necessary paperwork for a seamless transition of ownership.

One important question that every buyer considers is whether the previous owner’s liabilities will transfer to the new owner

In Norazlina bt Buang (berniaga sebagai pemilik tunggal atas nama dan gaya ‘B & Y Electrical & Mechanical Engineering’) & Anor v Tenaga Nasional Bhd [2021] MLJU 1659, it was held that:

“[33] It is trite that a ‘sole proprietorship’ is unlike a ‘registered company’ where there may be shared, joint or continuing liability (see the case of Tetuan Khana & Co. v. Saling Lau Bee Chiang & Anor. & Other Appeals [2019] 2 MLRA 112). A sole proprietorship thus imposes lawful/legal liability only upon the then sole proprietor; and without more and in normal circumstance, does not imply continuing liability upon successors in registered ownership.”

Guidelines to buy/sell a sole proprietorship:

As of the date of this article, the current owner should log into their EzBiz portal (Business Portal) to notify them of the change of ownership and complete the necessary forms. A payment of RM30 is required for processing, which must be made after submitting the application. The change will be processed within 24 hours after payment. Consulting with an officer from the Companies Commission of Malaysia (Suruhanjaya Syarikat Malaysia) or a legal professional is advisable to ensure compliance with regulations and protect your interests throughout the transaction.

Buying or selling a sole proprietorship involves careful planning and consideration. By thoroughly assessing the business, preparing for the transaction, and seeking professional advice, you can navigate the process effectively and achieve a successful outcome.