To sell a business with an exit plan is simply good business.  A business is a ball of energy, never sitting still but reacting and moving in different directions as the economy changes, new tools and innovations come to market, the stress and strain from competition and the ever changing demands of customers.  The challenge to succeed, feed their family, help and create happy customers and other individual motivations are what gets a business owner out of bed every morning.  It also includes the chance to do something different, learn something new, to see the rewards of hard work, to plant new ideas and watch them grow or to help someone do something they thought they may not be able to do.

If the business owner loses the hunger to learn, be the vision and leader of the business, it’s time for a change.  Because a business is so dynamic, it requires leadership.  If this doesn’t happen it will shrivel and die.  Capital, time and energy must keep moving otherwise it will slowly die and fade away.

If the business owner leading the business recognizes it is good business to plan for a change of ownership and therefore handle the change of ownership in a positive and proactive way.  If this is done, the chances of the business continuing to succeed are much greater and so are the chances of the owner getting the highest price possible.  There is a very simple reason for this.  The buyer of a business looks at and includes many things in their decision making process.  However, there are basically two ingredients, the cash flow the business generates and its potential to generate more cash flow in the future.  If either one is missing or it is unclear, the buyer will require a discount on the purchase price of the business and it will take longer to sell, if it sells.  If both are missing, it will be a business extremely difficult to sell as buyers will simply have other choices.

As the business owner works through their decision to sell the business, a critical component to help them sell successfully is to start to put into place what the business owner will move to after they sell the business.  It can be intriguing to watch older business owners’ work through the process of selling a business, handling all the negotiations and questions from the buyer and just prior to signing the documents to transfer ownership to the buyer, decide not to sell.  The reason they decide not to sell is because the appeal of cruising the world or playing golf 5 days a week or looking after the grandchildren all of a sudden doesn’t have the same appeal as going to work each day.  So a good exit plan for a business owner as its first priority is to make a clear strategy about what the business owner will do once they sell their business or what they going to move.

The next ingredient is to make sure a good team is in place to advise, guide and protect the sale of the business.  The team can include an accountant, business attorney, financial planner, lender and a business broker to market and handle all buyer inquiries about the business.  The most important ingredient to the business owner is trust.  If the business owner does not have a trusting relationship with any of the people on their team, they need to replace them.

Each business owner will have a different risk tolerance to different aspects of the transaction.  Many transactions only close if the seller agrees to provide some of the finance to close the transaction.  Third party lenders can bridge the gap between the buyer down payment and the seller note, but the seller has to be willing to be in a second position on the loan.

Each exit plan will differ for each business owner.  My golden rule is that when selling your business, put your feet in the shoes of the other party and see things from their perspective.  This is especially true for the buyer who has no history of the business, put down a sum of money they may never see again, take the emotional risk of not only being good enough to own and operate the business as well as the current owner, but learn as much as possible as quickly as possible or suffer the embarrassment of it all crashing down on them.

Related articles

• Business Owners Need An Exit Strategy (lawprofessors.typepad.com)
• Exit Planning – Leaving Your Business When You Want, To Whom You Want, With The Cash You Want (azbusinessresource.com)

Owning and operating your own business is very much a part of the American Dream.  Not everyone is qualified to live this dream but to help qualified buyers, the US Congress through the Small Business Administration (SBA) has put together a third party lending program.  The SBA itself does not lend money direct to would be entrepreneurs, rather they allow qualified banks to manage and execute loan programs that meet criteria set by the SBA who will in return, underwrite a portion of the loan to lessen the risk of the banks.  The rules are complex and change in reaction to the economy.  However, a prospective borrower needs to put their best foot forward or their loan will not be successful.  Here are 10 reasons your request for an SBA loan more than likely will be declined.

1. The SBA requires a Personal Financial Statement from each loan applicant and this document needs to show how much and where the down payment will come from to buy the business.  The SBA program requires the buyer to make a capital injection to buy the business; they will not approve a zero down loan.
2. The SBA wants loans made to citizens with a clean criminal record.  If you’ve had a drink driving offense and it goes back a few years, they will require a full explanation of what happened so they can determine whether or not they will underwrite their portion of the loan.
3. SBA loans are for a business with a positive cash flow.  With the loan application there needs to be a business model that shows the cash flow projection of the business, the price and terms of the deals.
4. If the business the buyer wants to buy includes a lease from a landlord, the SBA loan application needs to show that the landlord has approved a lease for the buyer and the lease will need to correspond to at least the length of the SBA loan.  That is, if the SBA loan is for 10 years, the lease will need to be a minimum of 10 years.
5. One of the major reasons for an SBA loan not being approved at the moment is due to the buyer having insufficient industry management experience in the industry the business being acquired is in.  If the buyer has extensive management experience but it’s not the same industry then it’s almost certain the loan will be denied.
6. The business plan and financial cash flow models need to include working capital for the buyer.  If the business purchase price is $1,000,000 but the business needs $150,000 in working capital, make sure the loan application shows where the working capital will come from.
7. When a business is listed for sale it can often be 6 months or more before a buyer comes along and makes an offer.  The SBA requires financial statements of a business to be no older than 90 days so the decision to approve a loan is based on current information.  The seller therefore needs to keep financial statements up to date if an SBA loan is part of the purchase.
8. If the buyer’s offer requires the seller to remain as a consultant to the business, the maximum period of time they will accept for the seller to be a consultant is 12 months.
9. The SBA requires that the buyer have a minimum credit score for a loan to be approved.  At the moment the score is 700 but it’s much better if the score is 720 or higher.
10. There are many banks that offer loans.  In addition to banks, there are service providers that process and underwrite loans.  Many lenders manage a book of loans often based on a mix of industries they know and have researched to help reduce and manage their risk.  As a result, your loan may be declined with one lender as they already have too many loans exposed to a particular industry or in fact, they may not want to lend in that industry.

The Boys Scouts motto is “Be prepared.”  If you plan to apply for an SBA loan, this motto will serve you well as it is not a quick process and can be drawn out if you are not organized.

Not everyone will agree but I am sure it’s closer to the truth than one might think: buying or selling a business is unlike anything else of value. To support my argument there are a number of reasons. Let’s look at some of them.

The price of a business is determined by a valuation. The rules of a valuation come from the law and then legal cases as well as the Internal Revenue Code and custom. The price for most other items of value are determined by market comparables (for example, when valuing a house), looking up a book or some online site such as Kelly Blue Book (for cars) or results from eBay or some other online service (for any item you can think of). That is, there is no legal interference with the value of any these items except a business.

When advertising to find a buyer of these items, with the exception of a business there are no rules. To be clearer, when selling any other item the owner wants the world to know it’s for sale. Regular and established advertising channels are used including online web sites, newspaper or magazine advertising, family, friends and anything else to find a buyer. Conversely, with a business, advertising is done using less familiar methods and in most cases, the advertising is obscure so family, friends, customers, employees, suppliers, landlords, lenders and others are not aware the business is for sale.

When a buyer and a seller enter into negotiations for anything except the business, it’s generally very simplistic and does not need the involvement of third parties. In contrast, negotiating a business often involves complex negotiations with sophisticated parties. These parties can include lenders, landlords, attorneys, accountants, business intermediaries or business brokers as well as hidden support for buyers and sellers such as family and friends.

When selling a business, to get the maximum price possible, normally involves a lot of work for an extended period of time. The steps the seller takes includes trying to increase revenue, recasting the financial statements to arrive at an accurate and supportable discretionary earnings of the business and repairs and upgrades to make sure the business looks the best. Items being sold other than a business can similarly be polished but there is a limit on what can be done and the amount of time to do it.

When the buyer and seller reach an agreeable point in the negotiations of a business transaction, all items must be converted to paper. One of the first items it defines is whether the business is being sold as an asset or stock sale with this single decision has many tax and legal implications. Additionally, this one decision in itself, can set off a series of negotiations or at least, in-depth discussion and analysis by both parties.

In some business transactions, the negotiations can trigger a set of different valuations to support each parties position and whether or not the transaction ultimately closes. For example, if the purchase includes real estate or a large number of physical assets or intangibles such as trademarks or copyrights or the business itself then there could be four valuations. The first is a valuation of the commercial property, the second is a machinery and equipment appraisal, the third is an intellectual property appraisal and the fourth a business valuation.

Buying and selling a business is unquestionably complex. The complexity can include the business and its different assets but added to this is the complexity of the emotions each party brings to the transaction plus the fact that it can sometimes take many months to finalize the matter adding an additional layer of complexity due to life situations happening such as health, legal, family, finance and many other items affecting the process. For a willing buyer and willing seller to eventually close the transaction, it will require patience and clear communication and normally, the help of a good business broker.

The law requires us to put on a seat belt when we get into our car and drive. The law also requires us to have car insurance in case we have an accident. Perhaps we do not like the government telling us what we can and cannot do but one thing the government does not tell us to do is put together a sound personal financial plan.

For those of us closer to retirement than the early stages of our career, if we do not have a sound personal financial plan then our chances of enjoying our retirement are becoming less by the day; or as now seems more and more likely, the date we start our retirement will be pushed out further.

If you have not put together a personal financial plan then the time to start is now. If you do not have a plan, there are plenty of financial advisers to choose from. If you are not sure who to use, ask your friends for a recommendation. Once you have some names, put together a brief summary of your situation and where you want to be and just as importantly, why. Now interview each of the recommendations you were given and find the person that makes the most sense to you. You are asking this person to assist you with one of the most important and long term tasks of your life, that is, helping you put together a financial strategy that will enable you to live a quality life when you retire.

Putting together a good personal financial plan can be confusing and take time. Do not expect to have it taken care of quickly as there are many moving parts and you will need time to learn and understand them before deciding they are right for you and your situation at the present time.

Some of the components to consider in a good personal financial plan include:

• Education and college funding for your children or grandchildren.
• Disability income insurance – both short and long term
• Life insurance with options of term, whole of life and universal life.
• Long term care insurance
• Retirement funds including IRAs, Roth IRAs, SEP-IRA, 401(k) plans
• Tax deferred annuities
• Estate plan and funding strategies
• Charitable and planned giving

As you can see by the abbreviations and acronyms there is a lot to know and understand. Creating a strong personal financial plan takes time as the strength of what you do will come from understanding your options and then deciding what makes sense for your situation.

Just like putting on your seat belt when you get in your car to drive, you have to start somewhere. The point of this article is to encourage you to start today, not in case you have an accident, which could happen but more importantly that you use time to maximize the returns you will get from your investment.

There is a US Court of Appeals judge by the name of Judge Learned Hand and he lived from 1872 to 1961 or until he was almost 90 years old. Originally from upstate New York, Hand graduated from Harvard Law School and became a lawyer. At 37 years of age he became a judge appointed to the Federal District of Manhattan and he became well known and respected for the quality of his judgments.

What caught my attention was one of the best quotes I’ve read regarding the paying of taxes. His quote is “…over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do it right, for nobody owes any public duty to pay more than the law demands.”

It looks like the campaigning for the 2012 Presidential elections has now started – some 16 months before votes can be cast. Perhaps it’s time to cancel your newspaper subscriptions and access to cable TV as the media are going to “entertain and inform” us with every happening. Wouldn’t it be nice to disappear for 16 months and come back on the day prior to the election and miss all this “noise?”

Regardless of your feelings about the above, what it is not time to do is ignore putting a business financial plan together. If you own and operate a business, just as it is important to have a personal financial plan, it is just as important to have a business financial plan not only for your benefit but also for those that work in the business.

Just as putting together a personal financial plan takes time, so too does a business financial plan. The place to start is by finding a qualified financial or wealth consultant to understand your business and the components you will use in your plan. The components you could consider using include:

• Medical, dental and vision health insurance – group or individual
• Supplemental health insurance
• Life insurance – group, keyman and individual
• Long term care insurance – group or individual
• Buy/Sell Agreements – with insurance funding
• Executive and employee fringe benefits
• Disability income insurance – group and individual
• Retirement planning – qualified and non-qualified

Other components to consider include debt management, property and casualty insurance and investment strategies.

Minimizing tax is good business. Minimizing tax and putting that money to work for the long-term is better business. The place to start is with a good business financial plan. What’s holding you back from getting starting?

One of the services I provide is a valuation to an owner that wants to sell their business. Almost without exception, the owner of the business overvalues their business. There are many reasons this happens but I think it mostly comes from business owners seeing shares trade on Wall Street based on the gross sales or gross revenue of the business. I have recently done valuations where the company value was just over $1,000,000 but the owner thought it was closer to $10,000,000.

Just as most business owners are unaware of the true market value of the business, most business owners are not sure how their business creates value or more importantly, how to calculate the value of the business or even the return on the investment made over the years of owning and operating the business.

In many cases, if not most, the business is the single biggest asset or investment of the business owner. To avoid treating the business as a ‘checkbook’ to pay the bills or as a job to feed the family and with little concern over the impact on either personal wealth nor the investment of time and money, the solution is to get a Business Assessment.

The Business Assessment looks at the strategies that build personal net worth as well as business net worth; maximizing the return to the business owner and their family. By understanding the value drivers of the business it then allows the owner to reduce the time and/or money in the operation or the amount of money they can extract from the business while still increasing the business net worth. The Business Assessment also provides clear data on historical calculations, forward looking “what-ifs”, and the growth of personal net worth to the owner so they can accomplish either a retirement objective or the next business endeavor.

If you would like more information about the different types of Business Assessment, click on this link.

If you would like to see a sample 182 page Business Assessment that reports at enhancing the value of a company, click on this link

To create the Business Assessment, we use proprietary software and this includes providing you with a limited license so you can see specific changes in the business and how this impacts your personal and business net worth. In addition, this software helps educate on the relationships between business value, personal net worth growth, and the specific sales, costs, overhead, and profit within the business and clearly shows how one number, large or small, can make a huge dividend towards any end game. A separate model demonstrates the relationships between business value, personal net worth, monthly contributions to retirement (or a desired level of liquid assets), and the performance of the business owners portfolio of investments to clearly demonstrate what they need to accomplish their overall life goals. Lastly, this software puts the acid test on the capacity to grow the business or shines a light on the underutilized capacity which has tremendous cost to the business and the owner.

After six months of licensed use of these tools, the owner can now focus on the direction of the business and operate with more effective objectives, and ensure the desired return on investment is managed with an ever watchful eye on the achievement of the end game.

If you have questions or would like more information, please feel free to call me on 916 570-2674 or email Andrew@RogersonBusinessServices.com

So many small business owners are buried in the minutiae of running their business they forget to step back, question where they have come from and why and then make sure they know where they are going. I am not talking about the direction of their business; I am talking about one of the most important assets of the business and that is, themselves. If something serious was to happen to them, what would that mean for the business? Can it continue? What steps are in place to replace themselves or any other key employees? If the business supports their immediate family what would happen to them and how would they survive? Perhaps the joy of running the business is declining and so it’s time to think about handing the business off to some fresh blood or find a new owner?

To help formulate an approach there are two key components to use. The first is an Estate Plan which can be a standalone process, or an Exit Plan which can include as one of its components an Estate Plan.

At its simplest level, for a business owner, an Estate Plan is a legal review where the assets a business owner accumulates over their life passes to the party the business owner chooses. In addition, part of the purpose of an Estate Plan is to move the assets in the most tax efficient way so the receiver avoids the burden of paying taxes or spending time and money paying taxes and thereby endangering the very assets the original owner is trying to protect. Remember the quote – an ounce of prevention is worth a pound of cure? That is the purpose of a good Estate Plan. And to make sure it’s done properly, an Estate Planning Attorney is the resource you need.

As a business owner moves towards retirement and winding down their day to day involvement in a business and sufficient time exists, an Exit Plan is a great tool. Its purpose is to capture all the critical components of a business to make sure the baton passes cleanly from the current owner to the next generation of managers or owners. For a business owner that has spent many years building their American Dream, it is a very emotional time as it includes reflection and looking back on where they started and what they arrived at and how they lived their life. At a practical level, an Exit Plan is about the future and ensuring the next generation continues the success of the business.

If your thoughts are moving to what you should be doing with your business and you would like a simple one page summary of the items to consider in an Exit Plan, please click on the following link The Many Steps in an Exit Plan.

If you are thinking of selling your business and want to know what items a buyer may want to review as part of their due diligence when buying your business, a 127 point checklist is available for free by clicking on the following link Business Transition Checklist.

As always, if you have questions about buying or selling a business, please give me a call on 916 570-2674 or send me an email to Andrew@RogersonBusinessServices.com

In most business transactions it is standard to include a Covenant Not To Compete. The logic is simple. The current owner of the business decides they want to sell and a buyer wishes to buy the business. As one of the conditions of buying the business, the buyer stipulates that the seller cannot open the same type of business that the seller currently operates as the buyer is concerned the existing customers will want to do business with the seller rather than transfer their loyalty to the buyer.

When used as a part of a change of ownership on a business between a buyer and a seller, the seller agrees not to engage in the same business or a similar business in a particular area for a period of time. Both these items form part of the negotiations. Generally the buyer wants the geographic area to be as large as possible while the seller as small as possible. Additionally, the buyer wants the time period to be as long as possible while the seller wants it to be as short as possible. Obviously, if the seller is retiring and no longer wishes to be active in a business, the time and geographic area may be of little concern and so they are willing to accept whatever the buyer wants.

What happens if the business being acquired has an online presence and gets business from the internet? This can be difficult for the seller as the buyer can rightly argue that they are not interested in buying the business unless the seller does not operate or be involved with a business in the same or similar industry that has an online or internet presence.

How do you decide the allocation or what part of the purchase price should be made to the Covenant Not To Compete? In the US, the IRS has a two pronged requirement. First, the amount must rest on economic realities and second, it must have independent economic significance. In other words, the value allocated to the Covenant Not To Compete must be realistic when taking into account the full purchase price and it must be able to be shown that restricting the ability of the seller to earn a future income by operating the same type of business must be real.

Some of the factors used to evaluate a Covenant Not To Compete include:
• The seller’s ability to compete and the seller’s intent to compete
• The seller’s economic resources
• The potential damage to the buyer posed by the seller’s competition
• The seller’s expertise in the industry and contacts as well as their relationships with key groups, for example, with customers and suppliers
• The buyers interest in eliminating a competition
• The duration and geographic scope of the Covenant Not To Compete, and finally,
• The seller’s intention to remain in the same geographic area.

A Covenant Not To Compete is a normal part of a business transaction negotiation. It can create tension in the negotiations, especially if both parties want diverse outcomes. That is, if the seller wants the geographic area to be within 3 miles of the current location of the business and the buyer wants 25 miles, that’s a big difference. It’s also not unusual for the buyer to test the seller to make sure the reason they are giving to sell the business matches their actions. For example, if the seller says they intend retiring after they sell the business or intend to move interstate after the business is sold and then says they want the Covenant Not To Compete to be a small geographic area for a short period of time, then it can raise a red flag.

For many small business owners, the single most important document for their business is the lease. Unfortunately a lease is generally a long and fairly complicated document. Because of its complexity, many small business owners either accept what they receive or do the bare minimum. Here are some suggestions for you, in no particular order.

• If your lease is coming up for renewal and you wish to continue operating your business, you have a choice. Stay in your current location or move. If you are seriously thinking about moving, do an analysis to weigh up the costs and lost time to move. Landlords are very motivated to find new tenants so it’s definitely the right time to review your options.

• If you plan to move, consider getting a qualified Commercial Real Estate Agent that specializes in negotiating leases to help you. I am a member of the Association of Commercial Real Estate Agents or ACRE and they have experts in different market segments.

• As I just said, landlords are motivated at the moment. Even if you decide not to move and your lease is up, consider negotiating not only your current price but also the terms and conditions of your lease. For example, if you want to run the business for another two or so years and then sell, negotiate with the landlord that they will assign the lease and you will no longer be liable if the buyer defaults and does not continue paying the lease.

• Similarly to the last point above, if your lease has a clause that says the seller must pay a fee to the landlord to review and approve the buyer, have this clause removed. I’ve seen instances where a seller has introduced three buyers to the landlord when trying to sell their business and each time the lease requires the seller to pay a fee of $1,000. The total cost to the seller was therefore $3,000.

• Consider having a qualified attorney that does business law review your lease. There is a cost to you but if they can save you time, money or a situation you did not know about that can be a good investment. Some attorneys may even negotiate with the landlord for you.

With the economy still soft, now is the time to negotiate with your landlord. “Make hay while the sun shines!”

If you own a business and receive an unsolicited offer to buy your business please be careful. If your business is currently for sale be even more cautious. There are con artists that have developed a clever process of taking your business from you and leaving you not only with absolutely nothing, but totally destroying your business and leaving you in debt.

Here’s a basic breakdown of their process.

Their easiest target is to contact the owners of businesses for sale, usually via listings on the internet and identify themselves as acting for a private party or a small investment group. They are looking for businesses generally that have at least a $1,000,000 selling price.

If the business is for sale by a business broker or intermediary, they will try to build a strong relationship with the seller. If they feel the broker or intermediary is an impediment to what they are doing, they then try to get the broker or intermediary out of the way by saying to the seller that the broker or intermediary is a hurdle to closing a deal.

Once they have a good relationship with the seller, they then make a strong offer with the condition they finance the deal over a short buy out period (say 6 to 10 months.) The offer will include a small downpayment, say 10% down AND as a stock sale (not an asset sale.) Under this scenario, the seller holds all the stock of the corporation as collateral, and of course, the sale includes the cash, Accounts Receivable and other items on the Balance Sheet.

Once they pay the seller the 10% deposit, they then require signature rights to the business bank accounts, credit cards and other assets while the seller “trains” them in the day to day operation of the business for the agreed two to four week training period.

Once the training is complete, they then clean out the cash, run up the credit cards, factor the Accounts Receivable, may sell off some or get loans on the fixed assets (vehicles, etc.) and do not pay any payable/liabilities. They even sometimes fire employees, usually never paying any of the businesses (or employee’s) payroll taxes or other taxes. Then, they disappear in a month or so having cleaned out the company by taking everything as cash.

Bottom line: These scams really do exist. It’s another reason to make sure your business broker is part of a State Association such as the California Association of Business Brokers or association such as the International Business Brokers Association. If you are planning to sell your business, please give me a call so I can help you. If you want to know how to find a good real estate agent, the California Department of Real Estate has a very good document to read that you can see by clicking this link: http://www.dre.ca.gov/pdf_docs/re16.pdf