Everyone is familiar with the Christmas song, The 12 Days of Christmas.  Without going into every verse of the song, the carol works forward with the first day of Christmas being a partridge in a pear tree, the second day of Christmas two turtle doves and so on.  The song is full of optimism and hope that the giver and receivers of the gifts will be thankful for life, the opportunity to share and hope for the future.

From researching the origins of the song, I came across something interesting.   One of the articles I read suggests the 12 days of Christmas is not about the 12 days prior to Christmas but in fact, the 12 days from Christmas until the beginning of Epiphany which begins on January 06.  When I thought further about this, it naturally combined with another favorite thing we do during the Holiday Season and that is to make New Year’s Resolutions.

New Year’s Resolutions are a powerful opportunity as they allow us to do three separate things.  First, look back at our experiences of the last year and decide if it’s been a good year and what we could have done differently.  Because it puts us in the mood, we also tend to go back and look at more than just the last year but initially the last couple of years and decide whether or not it has been good.  Once we start doing that, we obviously look back at our life and decide what we like and what we wish we could do differently.

Our next reflection tends to move to the present where we look at our life and what we now have.  We reflect on our family and friends and how important they are to us.  We also look at whatever means we use to sustain ourselves and put a roof over our heads, the food on the table, the clothes we wear and the myriad of other things that allow us to live our life.

This then brings us to the final reflection and probably the most exciting and powerful opportunity of all and that is to look ahead and decide what changes we’d like to make to build and enhance our life and our immediate loved ones.  This reflection, for obvious reasons, takes us to both our job and what we are currently doing or, if we own a business, how that business is performing.  Regardless of whether we have or do not have a job or own a business, it is the time to ask some questions.  These questions include whether or not what I am doing is worthwhile and fulfilling, whether it produces the income I need to live the life that I want, what changes I want to make to achieve the personal, financial and emotional goals I’ve set for myself.

So the point of this article is a couple of things.  As you embrace the Holiday Season, enjoy it as it is a special time and I wish you nothing but peace and goodwill.  If your time allows, sit down and meaningfully decide on your New Year’s resolutions.    If your New Year’s resolutions are likely to include either buying or selling a business you may want to consider a thoughtful and logical approach.

If selling your business is an option you are considering, this link will provide a simple summary of the steps.  http://www.rogersonbusinessservices.com/docs/TheManyStepsToSellingABusiness.pdf

If you would like more information then this link will allow you to buy and download a copy of my book Successfully Sell Your Business.  http://www.rogersonbusinessservices.com/book-successfully-sell-your-business

If buying a business is an option you are considering, this link will provide a simple summary of the steps.  http://www.rogersonbusinessservices.com/docs/TheManyStepsToBuyingABusiness.pdf

If you would like more information then this link will allow you to buy and download a copy of my book Successfully Buy Your Business.  http://www.rogersonbusinessservices.com/book-successfully-buy-your-business

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 sales and marketing plan is a document that most entrepreneurs don’t have time to put together.  I’m not sure why that is as it’s just as important as the business plan and indeed complements it.

The business plan outlines the vision, strategic direction and business and financial goals of the business.  The sales and marketing plan breaks down the business plan to show how you are going to get there and the tactics to use to attract the right customers.

The sales and marketing plan can be as complex and as detailed as you wish to make it.  It can include a list of tactics you could deploy, it can list and detail only specific tactics you plan to use or a combination of both.  It’s important, though, that you understand how each idea is to be used but you have some idea of the expected results each tactic should bring to the business.  There is an old adage in business management: If you cannot measure it you cannot manage it.  There is also a famous quote that says “I’m convinced that 50% of my marketing is effective, I just can’t tell which 50%.”

There is also another saying that says “I can’t afford to advertise.”  If you cannot afford to advertise then you probably cannot afford to be in business.

Some of the key items you want to see in your sales and marketing plan includes a profile of your typical current customer, what percentage of business they bring, where they come from and how they found you.  If you are planning on growing the business by either more of the same type of customer or a different customer demographic, this needs to be defined, measured and made sure it makes good business sense to target.   Sales and marketing should always be seen as an investment and just like all other aspects of your business, needs to bring a return that you measure or you need to go and try something else or adjust your sales and marketing plan.

If you are looking for different sales and marketing tactics there is simply no shortage of them.  Here are a few suggestions.  Each one needs proper consideration and research to make sure it’s the right strategy for your business.  These tactics include obvious things like your business cards, office letterhead and stationery, email signature, coupons or flyers as well as things like your website, blog, monthly electronic newsletter, networking, taking someone out to lunch once a week, social networking media such as Facebook, LinkedIn and Twitter.  Other strategies could include TV advertising, seminars to educate customers about your service, trade shows, hiring a Public Relations expert, joining local associations such as the Chambers of Commerce or other local business or trade association groups.

Just like your business plan, the sales and marketing plan needs to be a living and breathing document.  It needs to include projections and just as importantly, the results from any activities undertaken so you can tweak and constantly improve what you are doing.  Don not forget your sales and marketing plan should include how each person in the business answers the phone right through to the book-keeper.  There is no reason your book-keeper and clerical staff cannot answer the phone and offer a monthly special to see if they can bring in new business.  It’s a little unconventional but sales and marketing is about getting results, not whether something is conventional or unconventional.

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

Intellectual Property can sneak up on some businesses as it may start from a “good idea” that helps the business survive then gradually become an integral part of the business and later become a critical part of its existence. Interestingly, Intellectual Property also comes in many shapes and sizes. A business owner therefore needs to recognize these different shapes and sizes so if they choose to sell their business, they have the right legal protection in place that protects an intellectual property asset and therefore rightly earns the owner the amount it is worth.

So what are the different types of intellectual property? The IRS recognizes the following when they are part of a business transaction.

• Patents
• Computer Software
• Trademarks
• Recipes
• Engineering Designs
• Copyright resale
• Trade Secrets
• Architectural Designs

The bottom line is that intellectual property carries both legal and tax implications. An attorney is the expert to engage to understand and obtain the necessary legal protection. Not all attorneys have the necessary knowledge, so if this is an important component of your business, you may want help from an attorney who understands and specializes in intellectual property law.

Similarly, the tax treatment of intellectual property when a business is being bought or sold requires research to arrive at the right position and this is best provided by a CPA or similar tax professional. That is, the tax treatment for a patent may be different for a copyright which may be different for computer software etc.

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.

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.

Most business buyers don’t have a shortage of questions they want to ask when they are looking to buy a privately held company or business. There are obvious questions about the level of sales, qualifications and motivation of the employees, the relationship with the landlord, if payment to suppliers is up to date and many other good and appropriate questions.

Apart from these questions, there are others that may help a buyer decide if the business is a good fit for them. These questions include the following:

1. Does the business have any tax liens in place and are there any tax liens against the owner?

2. Does the business have any lawsuits pending?

3. How diverse is both the customer and supplier base?

4. What’s the reason the owner wishes to sell?

5. Is the business in, ever been in or likely to go into Chapter 11 or Chapter 7 bankruptcy?

6. Is the lease transferable and is there a cost to transfer the lease?

7. Are the employees unionized?

8. How could the business be expanded?

9. How could the operations of the business be improved?

10. Has there been any negative press on the business or the industry?

11. Has there been any recent change or upcoming changes that could have a negative impact on the business?

12. Does the business have a good management team or key employees in place?

13. Are there written operations and training manuals that are up to date?

14. Who prepares the financial statements of the business and what certified professional assistance is used?

15. What is the role of the seller in the business on a day to day basis and what documentation exists about the role they play?

A buyer has many questions to ensure they feel comfortable about the business they are buying. The questions are not just about what, where and how the seller is involved in the day to day operation of the business, but about the skills and expertise of the buyer and whether they think they can replicate what the seller does so the business doesn’t decline. There is a saying – no question is a stupid question – and this especially applies when buying a business.

If you are thinking of becoming a business owner, you have three choices. Those choices are to start a business from scratch, buy an existing business or buy the rights to a local franchise. Each option appeals to a different type of entrepreneur. If you more information, you can go to www.businesstransactionbooks.com where you can buy and immediately download a copy of a book on each option and decide what makes the most sense to you.

There are two critical things a buyer of a business is looking for and these are cash flow and potential. They may be willing to compromise on almost any other thing but if the cash flow’s not there to provide an income to sustain their family and livelihood, service the debt of the business and include a buffer in case they need time to re-establish upward momentum in the business and the industry the business is in is declining, then it will be a challenge to close the sale.

If the cash flow and potential are good, consider the following 6 questions to help present the business to the market. And a Golden Rule I use when helping buyers and sellers is to put your feet in the shoes of the other party, that is, don’t see things from your perspective, see them from the perspective of the other party.

1. Does the business present itself positively and therefore have buyer appeal? We’ve all heard the expression – does it sizzle? A buyer wants to be excited about the business and what it does. Making sure it has plenty of sizzle and presents itself well to the market is very important. In residential real estate it’s called “curb appeal.” Make sure the business presents well and has good “curb appeal.”

2. Who is the best buyer of the business? Not every business can be bought by every buyer. Criteria that may exclude a buyer, depending on the business, include technical skill sets or mandatory qualifications.

3. How is the neighborhood around the business? If the business is located in an attractive mall or in an upscale area it follows that it will attract a similar clientele. This would obviously be more attractive to a potential buyer. Incidentally, this doesn’t mean the business is worth more, as some sellers expect, it just means if the business is valued and priced correctly it may have a better chance of selling.

4. Most sellers can quickly explain what they would do if they had more time. This can be useful talking points between the seller and buyer. Most qualified buyers will be looking for things they can do better if they owned the business. As we said above, potential is critical to a business buyer.

5. What is the buyers risk level and how easily can it be quantified? Buying a privately held company comes with a lot of risk; unaudited financial statements, changes to the law that affect the industry the buyer is looking at joining or changes to the tax laws that affect how much money the buyer as the business owner gets to keep, and more. As the seller, you have a lot of business and industry knowledge. Don’t be afraid to share your observations without couching it in terms of guarantees or future expectations of the performance of the business.

6. Does the price and terms of the deal pass the “smell test?” One of the services I provide is business valuations as well as machinery and equipment appraisals. After doing all the research to arrive at the final value I always do a “smell test” to make sure the figure arrived at makes sense. If it doesn’t, it means doing more research. The “smell test” or “gut check” is a great way to keep things real.

Buying or selling a business is complicated. It’s generally a series of questions with follow up questions looking for one final yes. It requires patience and stamina as there are so many moving parts.

On Monday, September 27, 2010 the President will sign into law HR 5297, the small business bill.  This bill has huge ramifications on commercial lending AND the economy.  Most people don’t realize how big this bill is and the ramifications of it on small business lending.

The key SBA provisions of HR 5297 are noted below:

7A SBA loans

• Increase to maximum SBA 7a loan amount to $5,000,000 (permanently)
• 90% guarantee through December 31, 2010
• Fee waiver for the rest of 2010 (subject to available funding)
  

504 SBA loans

• 504 Debenture increase to $5,000,000 for most applications and $5 ,500,000 for manufacturers (permanently)
• Two year window for refinancing debt (details provided below)
• Two year extension of the First Mortgage Pool (FMP) program from the date of the first pool issuance – first pool issuance expected to be September, 2010
• Fee waiver for the rest of 2010 (subject to available funding)

504 Refinance Provision

Here is a summary of the provision:

• Property must be owner occupied (51% or greater)
• Debt must be at least two years old
• Borrower in operation for the entire two year period
• Proceeds of which must have been used for 504 eligible fixed assets for the benefit of a small business concern
• Payments must be current for at least one year prior to application
• Maximum Loan To Value on the existing property is 90%
• With additional collateral, the maximum LTV on the existing property is 125%
• Federally guaranteed debt is not eligible for refinancing (7A, 504, USDA)
• Two year window

It is important to note:

• Not every bank will participate in these changes.
• In addition, it could be MONTHS BEFORE THE CHANGES IN LOAN AMOUNT AND THE REFINANCING PROVISIONS ACTUALLY KICK IN. The bill is vague in its timelines.  Basically, Congress has passed it, now the lenders and the SBA need to execute it and that can take a month or two or three.

If you are thinking of becoming a business owner, you have three choices. Those choices are to start a business from scratch, buy an existing business or buy the rights to a local franchise. Each option appeals to a different type of entrepreneur. If you more information, you can go to www.businesstransactionbooks.com where you can buy and immediately download a copy of a book on each option and decide what makes the most sense to you.

For most owners of a privately held company, when the time is right they want to sell their business for the highest price possible in the quickest time possible and live happily ever after. There is nothing too complicated in that and at a basic level, that’s perfectly fine. However, a question to ask is whether the business owner wants to sell the business or is their preference to transition the business?

The difference between selling the business and transitioning the business is as different as night and day. Selling the business simply means looking for the buyer at that moment in time who will pay the highest price possible. Transitioning the business requires the owner to step back, systematically review all the options available to the business then creating a plan to arrive at that outcome.

For example, the business owner may have other options other than selling the business and taking the highest or best price. If the business owner has immediate family working in the business the preference may be to continue the legacy of the current owner by transitioning the business to the immediate family members. If this is the case, this brings into play a number of actions that need to be carefully and fully researched. Answering questions such as tax implications, legal questions such as what liabilities and responsibilities move from the current owner to the new owner, finance questions such as how any current loans need to be handled and indeed, how much and where is any money coming from to pay the current owner for the value they have created in the business that will fund their retirement or next journey in life.

Before spending time working through the above scenario, the question of transitioning the business goes back to a simpler level. And this is the point of this article. It requires the current business owner to look at their own needs and either make decisions or arrive at conclusions that make sense to them. A list of the items to consider can be long and obviously vary with the individual but could include asking questions about what to do with the business and how any decisions impact the owner’s family needs. Other less self evident areas include the owner themselves and what they want from their legacy. It also touches who they are as well as their attainment of goals, self esteem, need for recognition, appreciation and self respect.

Owning and operating a business often provides many emotional and life sustaining needs such as job security, retirement, business colleagues, group affiliations, status, recognition, self respect, success and creative energy to name a few. If owning and operating a business provides these, then selling the business requires the business letting these things go and moving to more or equally rewarding opportunities. If you are a business owner planning on selling your business, recognize these areas so you get answers before you start the process of trying to sell and perhaps end up changing your mind. If you are planning on becoming a business owner, recognize these areas will be part of your decision making process as you look for the right opportunity.