Only negotiate when selling or buying a business.  This may seem an unusual heading to an article but it now keeps happening too many times and I feel compelled to write about it.

There is no question that selling a business is difficult as there are so many items to consider.  Equally, buying a business is extremely difficult not the least because the buyer may not know the seller but more importantly to the buyer, because they are yet to fully understand how the business works and what has made it successful.

When you put these basic unknowns together and add the imprecise art of valuing a business, both the seller and the buyer understand there will be a negotiation on the final purchase price of the business.  What is intriguing from my perspective is that sellers and buyers can spend a lot of time and negotiating energy to purely focus on the purchase price, which is important as the seller does not want to take less than they think the business is worth and the buyer does not want to pay any more.

However, there are two things missing in this equation.  First, the terms of the deal are probably more important than the final purchase price.  Just as the final purchase price is emotional for both the seller and the buyer so too are the terms and conditions.  These emotions can go both ways.  For example, the seller may be willing to work for free for 4 weeks after the buyer owns the business and not get paid.  That is, the seller does not mind giving their time and emotionally does not feel they are giving up too much.  If you put a dollar value on it, it could be worth $2,000 to $20,000 depending on the equivalent salary the buyer would pay.  Additionally, having the seller work for four weeks and train the buyer instead of one or two weeks could be tremendous value as the buyer gets to absorb more knowledge from the owner.  There are many other examples such as the seller carrying a note as part of the purchase price for a lower rate of interest than a third party lender, the seller being willing to come back and work for three weeks in 6 months time so the buyer can take time off with their family, the seller stepping in to help the business if a key employee becomes sick.

The trend I am currently seeing is for the seller and the buyer to over negotiate every detail in the transaction.  The buyer feels they are doing the seller a favor by buying their company and as a result, should get every demand they make quickly and easily.  Conversely, the seller thinks the business is worth more than the buyer is offering and now that the recession is healing, the buyer is going to do so much better and therefore the seller wants to be paid for some of the success they think the buyer is going to enjoy.  The position of the buyer and the seller is not unreasonable however, if it gets to the point where it kills the deal, which is what I am seeing happen, then it makes no sense.

Another factor that effects the above is that the seller and buyer need to come to terms on the purchase price and terms of the deal.  Separate to this negotiation however, the buyer has to deal with negotiating with the landlord, the lender and if it involves a franchise, the franchisor.  The buyer may even have to negotiate with family and friends to borrow money to finance the initial purchase of the deal.

The bottom line in all this is that it is critical to understand what the word negotiation means.  According to one dictionary it says “a discussion set up or intended to produce a settlement or agreement.”  The key words are ‘settlement or agreement’ that is, both sides have to give and take or there will be no settlement or agreement.  To be clear, once one party demands too much the other party will quickly move to the same position and then neither party will get what they want.  Probably the most important component a buyer wants when they buy an existing business is goodwill.  In most business sales, the goodwill has the highest value.  For the buyer to maximize the goodwill they expect to receive from the seller, there is a need for both parties to negotiate in good faith and respectfully.  This also applies when the buyer has to negotiate with the other parties in the transaction, especially the landlord.

A landlord is completely separate from the business.  If the seller of the business has paid their rent on time and been a good tenant, the landlord does not want to see them go.  In most cases, there is nothing in it if the landlord approves or refuses to approve the buyer to take over the lease, that is, the landlord really does not care if the seller and buyer have agreed on the price and terms of the sale as it’s the landlords job to look after the landlords interests.  If they do not like the buyer they will not hesitate to deny the buyer a lease.

Negotiations can be tough.  Its fine to make negotiations tough.  If it gets to the point where the negotiations are no longer “a discussion set up or intended to produce a settlement or agreement” then neither the seller or buyer will end up with what they want.  Animal instincts such as the need to win, be right or pay a fair price can derail a successful business transaction.  Understand your personality and the strengths and weaknesses you bring to a negotiation and just as importantly, understand what is important to the other party.  The chances of success have just then improved.

If you are thinking about selling your business and would like to know its value, please email me at Andrew@RogersonBusinessServices.com and I can put together a Brokers Opinion of Value for you.  If you would like to see a sample document, click the following link:  http://www.rogersonbusinessservices.com/services/selling-a-business

Related articles

• Negotiating for Wimps (inc.com)

Successfully sell your business

Have you thought of using a transition plan when selling your business?  The process to sell a business is not quick and easy.  At the moment it is taking about 8 months to sell a business, if it sells.  This means the business is available for about 6 months.  The buyer and seller then complete negotiations on the purchase price including the terms of the deal.  The next main step is to start the due diligence and if both buyer and seller are still in agreement, escrow opens and then hopefully about 3 to 4 weeks later, escrow closes and the business moves from the seller to the buyer.

Even if the business closes escrow, almost without exception the buyer wants the seller to continue in an active role in the business in some capacity for a period of time.  The buyer wants time to meet and get to know the employees, set up arrangements with suppliers, put basic items in place like bank accounts, and a myriad of other items.  At the end of the day, however, it all needs to make sense for both the seller and the buyer and the best way to do that is to build a transition plan.

What is a transition plan?  A transition plan is generally a window of time of say 4 to 8 weeks that makes sure all the important and often taken for granted details of owning and operating the business successfully move from the seller to the buyer as quickly and smoothly as possible.

What should you include in the transition plan?  On my website I have a free document called a 127 point Business Transition Checklist.  It is meant to be comprehensive but not exhaustive as unique items apply to each type of business.  If you would like a copy of this document please click on the following link: http://www.rogersonbusinessservices.com/sell-or-buy-a-business-free-documents

A transition plan can overlap with an Exit Plan.  An exit plan is essentially a process for the business seller to exit the ownership of their business to manage the protection and eventual transfer of assets or stock in a proactive, tax efficient manner.  Essentially a business owner can have 5 types of assets.  These are Personal Property, Real Estate, Business Interests, Insurance Plans and Employee Benefits.

Personal property includes savings, stocks, bonds and personal effects.  Real estate includes both residential and commercial property.  Business interests include the business legal entity such as a corporation, partnership or LLC.  Insurance plans include life, health and annuities.  Employee benefits include pension, 401(k), IRA and stock options.

A quality Transition Plan is all about success.  Its ultimate goal is to ensure that the business and the owner move from actively owning the business to handing it off to its new owner.  The best analogy I like when a business transitions from the seller to the buyer is that it’s like juggling two snowflakes.  Every snowflake is unique because of temperature, the absence or inclusion of a piece of dirt, the number of water molecules, spins of electrons, hydrogen and oxygen etc.  So too is a business and its owner.  To preserve and maintain the business and protect its uniqueness it must be treated carefully and properly.  The same applies to the owner.  The owner can live without the business and the business can live without the owner as long as proper care and attention are given to each so when the next owner comes along with their uniqueness, like another snowflake, it has to make sure it can mesh with the business and both be successful.

Related articles

• Will 2012 Be the Year to Sell Your Small Business? (smallbiztrends.com)
• Sell a business with an exit plan (RogersonBusinessServices.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.

If you embrace the saying “Two things in life are certain: death and taxes” and you own a business, it is a good idea to put a plan in place to protect the business. You protect the business not only when you own and operate it but just as importantly when you decide it is either time to sell so you get the best and highest price possible or if you decide to transfer it to your children or employees, it is in the best condition possible.

If the plan is to transition the business to a new owner and do it over a one to three year time period, the best way to do everything correctly is by using an Exit Plan. So what’s an Exit Plan?

An Exit Plan is for the principal and family of a privately held company that puts together a comprehensive review of the business owner’s personal and business interests. With this information, the owner can then carefully move over a period of time of 12 months to 3 years from the day to day management and operation of the business to the next stage of their life.

A lot of small business owners decide to sell and move to the next phase of their life as quickly as possible. Often this means the business is not in the best condition it can be and so the sale price can be lower. In addition, personal financial planning strategies may not be maximized, tax minimization strategies may be mixed and so it goes on.

There are many components to a good Exit Plan. These include:

• Creating a summary of the main goals and putting them into a timetable.
• Creating a contingency plan in case unexpected things happen.
• Creating a multi-disciplinary team to help execute the plan
• Getting a business valuation
• Brainstorming exit plan options and arriving at the best option(s).
• Understanding the value drivers of the business for better decision making.
• Recognizing key employees
• Financial planning
• Estate planning
• Reviewing insurance needs
• Conducting annual or semi-annual reviews until the Exit Plan completes.

If you would like a one page summary of the steps in an Exit Plan, click this link

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!”

All businesses have two classes of assets. They are either tangible or intangible. A tangible asset is property or something you can touch, for example a piece of land or a building. Other examples include a photocopier or desk and chair and these are collectively called Fixtures, Furniture and Equipment. Intangible assets cover a range of items and include goodwill, covenants not to compete, trademarks and trade names, licenses and permits and more. So a good question at this point is “Why do I want to know this and why do I care?”

The answer to the above question whether you are a buyer or seller is that when you are buying or selling a business, there are tax implications you need to know about. And this especially applies if you are the seller as it will affect the amount of money you put in your pocket once the business sells and eventually catches up with the buyer when they sell, plus during their ownership of the business with the depreciation they are able to take as a tax deduction.

The main point of this article is to simply make buyers and sellers aware that there are tax consequences that flow from buying or selling a business. If you own a business and are considering selling, talk to your tax professional so you understand what taxes you’ll need to allow for when the business closes escrow and when they are due and payable. If you are the buyer of the business, there are different tax implications for the different allocations we mentioned above. For example, a Covenant Not To Compete paid to the seller is generally taxed at ordinary income. For the buyer, they are able to write off this part of the purchase price for tax purposes generally over a 15 year period.

Too much information? You bet. Is it complicated? You bet. Is it important? If you own a business and want to know approximately how much you’ll get to put in your pocket if you sell the business and not waste a lot of time, unnecessary stress and money and then walk away from a wonderful offer from a buyer because you don’t get to keep as much of the purchase price as you thought you would; I think you’d want to know.

Also, in a lot of cases you may need to spend time to make sure some of the assets of the business are all in order both from a tax perspective and also a legal perspective. If you own some patents, trademarks, trade secrets, copyrights, architectural designs, recipes, engineering designs etc but the right legal protection is not in place and you disclose these things to a buyer who understands they are not legally protected, you may have literally given it all away.

The above intangible assets often require special legal protection. This legal protection is best locked in place by talking with a qualified attorney who specializes in intellectual property. For example, a patent is a property right granted by the United States Patent and Trademark Office and should be recorded on the books of your company. Making sure these assets are legally protected is simply good business but it does take time, understanding what needs to be done and buying the right help to ensure it’s all in order.

One of the hidden and sometimes very surprising scenarios which buyers and sellers of a business experience, comes when there is a need for both parties to agree on the Purchase Price Allocation. The surprise comes into play as most buyers and sellers have not heard of the Purchase Price Allocation and when it needs to be agreed upon, both buyer and seller can find it emotionally challenging, especially if the negotiations have been long and difficult.

So what is the Purchase Price Allocation? The Purchase Price Allocation is a tax reporting requirement on the sale of a business. Both the buyer and the seller must report their own understanding of the Purchase Price Allocation and the IRS can and does check to make sure both parties report the same information.

So where does the challenge come into play? The challenge comes into play because the buyer has a different tax need to the seller. That is, it’s the sellers preference to sell his stock of the company to the buyer as he does not need to pay back any taxes they have claimed as a deduction when operating the business. The buyer wants the exact opposite in that they want to buy assets, not stock, so they can start to depreciate the assets and thereby lower their tax bill.

The general process is for the seller to list the business for sale at a specific price. The buyer does their research, makes an offer and if all goes well, both parties come to an agreement, perform due diligence and close escrow. Just prior to closing escrow is when the Purchase Price Allocation must be agreed upon. If an escrow company is handling the transaction for both parties, they will require an agreement from both parties on what the Purchase Price Allocation should be. It’s not too common, but it does happen, where the buyer and seller have spent months working together on this transaction and then it falls over because they simply cannot come to an agreement on the Purchase Price Allocation. This happens when the negotiations have been stressful and difficult and the frustrations simply come to a head at this point with the Purchase Price Allocation being the catalyst.

The solution to prevent this happening is simply education. If the buyer and seller are aware of what the Purchase Price Allocation requires, then it can be handled quickly and cleanly. There is a need for both parties to give; just like all the other items they have negotiated. Plus, one of the best places to start is with the initial inquiry of the buyer. If the seller has decided he wants to only sell their stock and not do the transaction as an asset sale, by stating this upfront it can lessen that problem.

A lot of buyers are unwilling to buy the stock of a company for two reasons. The first reason is that if they buy the stock of the company they are liable for any previous actions of the seller. This liability can be mitigated through seller personal guarantees and insurances but it still makes a buyer uneasy. The second reason is that the buyer doesn’t get to depreciate the assets from a new tax basis, that is, they simply continue the depreciation rates the company currently gets. If assets have therefore been fully depreciated, the buyer gets no new tax benefit.

Buying and selling a business is more complicated when the tax costs and benefits come into play. It’s the wrong approach to take when buying or selling a business that there is a need to win each negotiation. By definition a negotiation means each side giving. If the goodwill to negotiate is not there, there is little likelihood the transaction will close.

Small businesses are a critical part of the economic landscape. All the businesses on the Dow 30 started as small businesses, reached a critical mass that then led them to becoming a public company and grow to where they are today. Depending on whose statistics you use, small businesses make up 98% of all businesses in the US economy.
One of the benefits of being the owner of a privately held small business is that you get to take tax deductions that wage and salary earners are unable to claim. This is all part of the risk and reward scenario that comes from owning and operating a small business.

When it comes to selling the business, these tax deductions can get in the way as it reduces the true cash flow of the business, which affects the business valuation and therefore how much the buyer is willing to pay. To navigate this scenario, it’s important to understand how to deal with these legitimate tax deductions or as they are called, add backs.

An add back is a legal expense that appears in the financial statements of the business such as the profit and loss statement or tax return but has no true economic value in the performance of the business. For example, most business owners choose to take out health insurance on themselves and possibly their spouse and children. If the spouse and children do not work in the business then it would be legitimate to accept this expense as an add back. In this example there are two critical things. The spouse and children must not be currently working in the business and they must not work in the business once the buyer takes over. Other add backs the business owner may choose to run as an expense through the business includes personal expenses, auto costs be it gas, repairs, maintenance or insurance for non working family members, cell phones and vacations claimed as business trips. Another acceptable add back is the payroll tax paid against the salary earned by the business owner.

Legitimate add backs play an important role when appraising and negotiating a business. They can be contentious but the best approach is to prepare a report that shows what add backs the seller claims as reasonable so the buyer or lender can have an open and honest discussion.

The best approach when claiming add backs is to only claim them if they are sizeable in nature and there are not too many of them. What is sizeable? That depends on each business but I would suggest anything greater than $1,000 is a good starting point and I would not suggest trying to justify every add back or a buyer will feel too uncomfortable as in the end, they don’t want to spend too much time and energy worrying about every dollar and cent.

If you own a house and decide it’s time to sell, you have a choice. You can choose to handle the process on your own in which case you would be a For Sale By Owner (or FSBO) or you can choose to have a real estate agent represent you. If you own a business or are a potential buyer of a business you can choose to handle the transaction on your own or you can choose to have an agent or Business Broker represent you.

If you choose to have a Business Broker represent you, it’s worthwhile understanding that some Business Brokers belong to associations and these associations have a code of ethics. The International Business Brokers Association (IBBA) is an international association that brings together business brokers from many countries. At last count, there were approximately 28 countries in the IBBA.

The IBBA has a code of ethics and this includes the following articles:

Article 1 – Broker is charged with being knowledgeable with trends affecting business opportunities.

Article 2 – Broker must protect public against fraud, misrepresentation or unethical behavior.

Article 6 – Broker represents interest of their client but it is incumbent upon the broker to deal fairly to other party or parties involved.

In addition to the IBBA, there is the American Association of Business Brokers (or ABBA) plus there are many state or regional business broker associations. A few examples include the California Association of Business Brokers (CABB), Texas Association of Business Brokers, New England Business Brokers Association and many others.

The bottom line is that you should have expectations from a business broker or intermediary you using to represent you and your interests. Being a business broker is not normally restricted to just one skill of closing a transaction. Business brokers assist with business valuations, machinery and equipment appraisals, introductions to third party lenders at banks, credit unions or specialized businesses that handle SBA loans, introductions to legal experts or tax and accounting experts and many other professionals.

At the end of the day, a qualified, educated and motivated business broker should add value to the process of buying or selling a business. There are many associations which they can choose to belong and each has their own code of ethics. This should provide great reassurance that your interests come before those of the business broker and it should be your expectation that this is the case.

Selling or buying a business is a complex and involved transaction. The chances of the transaction closing are greatly enhanced when a business broker or an intermediary is involved as the seller and buyer have a lot of professional, personal, financial and emotional items at stake. Make sure the business broker or intermediary reflects your values and adheres to the code of ethics that are part of any association that they belong. In some states, the business broker or intermediary is required to have a license. Make sure that if this is the case, they meet that requirement.