Chapter 3 Financial Statements Cash Flows And Taxes Financial Management What You Need to Know When Selling a Business

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What You Need to Know When Selling a Business

CHAPTER 1, PART 1 – INTRODUCTION / PREPARATION

Review

Every business is eventually sold or closed…you can’t do that!

But most businesses that are for sale NEVER SELL!

The purpose of this column is to assist business owners in planning and executing a successful internal or external business succession/transition, and to help buyers find and successfully purchase valuable businesses. We will teach you how to do this at a “street level” level, but we do not intend to make you a legal or tax expert. You’ll still need your own attorney and CPA, but you’ll know how to identify key issues and know the main options available to you. This should be a huge advantage for you when it comes time to transition your business.

Prepare yourself first. We’ll go into more detail in future articles, but here’s an overview.

Sellers

If you’re not a really willing seller, with realistic expectations about price and terms, then you’re probably just wasting your time. Know how much your business is realistically worth. For example, some companies are worth twice their annual revenue, but most are not. Is your business for sale, but only if you can get Xx the annual gross revenue?

Learn about your tax situation and what to do if you’re facing a potential tax disaster. For example, if your business is a “C” corporation (or has been for the last 10 years), then a faulty sales structure means that some sellers owe the IRS more than half of the total sale price for the business? Do you know if you have this problem? If so, do you know how to “fix” it?

What about payment terms? They affect both taxes and risk for both parties. The buyer can afford to pay more if the risk is lower or the tax effects are better. After all, “price” is not “price” – terms are key. What counts is the money in your pocket after taxes that you KEEP after you leave!

Perhaps MOST IMPORTANT: Be emotionally prepared. This is your baby – are you really ready to part with it?

Contractually protect what you sell. Can some or all of your employees leave after the sale, taking key customers with them? Can you realistically sell a business that could lose a large portion of its business this way?

Make it easy for your successors to keep what you sell. Customer retention after the sale is crucial. How can you help the buyer keep what you just sold?

Make the buying decision easier for your successors. Start by preparing a brief summary of your business as follows:

First you need to answer three questions:

1. WHO is your best customer (make a list of your best prospects)?

2. WHY would we want to buy YOUR company?

3. Why NOW? If your business is so wonderful, why are you for sale?

Create justifiable pro-forma cash flow statements that show the real benefits of ownership you have received in the past.

If you receive other benefits from ownership besides profit and salary, let potential buyers see that. Explain any adjustments you need to make.

You can sometimes see this as “free cash flow,” “available cash flow,” or EBITDA (earnings before interest, taxes, depreciation, and amortization). Regardless of the terminology used, the goal is to determine the true financial benefits of ownership.

If you sell more than just customer accounts, create a pro-forma balance sheet as well.

Know how much business you’re doing with your key accounts and how you’ll ensure they stay with the company after you’re gone.

Get to know your vendors and how they are likely to respond when you retire.

Prepare for all these answers in advance, and most of them will be written down – maybe even prepare a presentation book.

Do your best, but don’t mislead or predict the future. You don’t know how the buyer will act in the future, and you don’t want to do anything that “predicts” the results. It can even be a reason to reverse the transaction if your successors don’t get things right.

Be prepared before you have your first meeting.

Have abbreviated material ready for discussion and/or display, and be prepared to provide more detailed information as soon as mutual interest is established and a confidentiality agreement is signed.

This is probably the biggest sale of your life – you owe it to yourself to be prepared.

What about “The Price”?: “The Price” deserves special attention, in part because it’s often quite an emotional topic. “Price” can mean much more to a seller than just money. Subconsciously, it can even be understood as a measure of the value of a person’s life’s work.

One way to keep things in perspective is to remember that the sale has to make financial sense for the buyer or you won’t have the sale. This will need to be “drawn in pencil”.

What about payment terms?: Terms are critical to how the sale is “penciled”. In fact, terms are often more important than price. In addition to having a major impact on annual cash flow, the terms affect risk and taxes for both parties.

Win/Win Negotiation: You most likely don’t HAVE to sell, at least to one specific buyer. Also, the buyer most likely does not HAVE to buy your business. This means that the sale will most likely fall apart as soon as either party perceives the sale to be a “loss”. Conditions are often the key to a “win/win” result. Creative expressions can even be “win/win/lose”. (The “loser” is the IRS.)

Editor’s Note: This is the first installment in a series of columns on buy/sell agreements for any business, valuation and tax issues, internal shareholder buy/sell agreements, related estate planning, employment agreements and non-compete agreements.

The authors will give you a hands-on understanding of the fundamental legal, tax and financial concepts you need to know about the biggest financial events in your business’s life – nothing else is available.

Since many business owners are buyers and every business eventually sells or closes, this is essential for anyone who owns, plans to buy, or will eventually sell a business.

From a team of experts responsible for hundreds of successful business transactions, you’ll learn better ways to buy, sell, merge or keep a business internally. You don’t have to be a technical expert, but you should know enough to guide your attorney and CPA. This will teach you how.

In addition to the essential fundamentals of buy/sell agreements for any business, this material covers related estate planning, valuation and tax issues, shareholder buy/sell agreements, employment agreements and non-competition agreements, all as essential parts of a comprehensive business documentation package.

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