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.
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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.
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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.
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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.
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Whether we are a business or an individual we need to understand ‘our tax position.’ Perhaps you are a business owner who is thinking about selling your business?  You have been doing this for many years and you have made the decision to sell and move to something new.  You are probably burned out, have a concern about your health and decided to move to a bigger and better idea.  Congratulations!

So step one is the decision to sell.

What should step two be?
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When talking about good strategies to limit the amount of tax the owners or the business has to pay, there are three issues to consider.

The first issue, which tends to be the most obvious but also the most difficult, is to encourage business owners to take advantage of solid tax planning.  The demands of owning and operating a business especially during a difficult economy does not seem to provide a good Return On Investment for the time or money it may cost to find out the best direction to go.  By avoiding good tax planning can in turn mean the business pays more than its fair share of tax at both the business and personal level and that does not make a lot of sense.
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The obvious question to ask when you plan to sell your business is “How much of the final purchase will I get to keep?”  That seems a very fair and reasonable question.

Unfortunately, it is not a quick and simple answer.  The buyer of your business will make a final decision to buy the business based on the maximum operational cash flow they can get from the deal.  The seller has a different agenda which is to maximize the amount of the purchase they get to keep after paying all taxes.
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How do I minimize the tax I pay when I sell my business? You have made the decision to sell your business.  You have decided what you will move to once the business is sold.  You have a valuation so you know what your business is worth.  You’ve looked at the business with fresh eyes and have it looking good so when a buyer comes along they will like what they see.  As they say in the Classics, you are all dressed up and ready to go or as I like to call it, you are seller strong.  That is, you know where you are going and how you want to get there.

However, there is a final piece you need to know so you can maximize the value from selling your business and this is to understand how much tax you will have to pay.  This may seem like a waste of time and money but in fact it is the opposite; and here’s why.
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Not everyone will agree but I am sure it’s close to the truth that buying or selling a business is unlike anything else.  Here are four reasons.

First, the price to list a business for sale generally comes from a valuation.  The rules of a valuation come from the law and legal cases as well as the Internal Revenue Code and custom.  The price for most other items of value come from 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.)  That is, there is no legal interference with the value of any of these items except a business.
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Over the years, the sale of many businesses includes a component of seller finance.  Since August 2008, a component of seller finance for privately held companies has become much more the norm as banks and third party lenders have been reluctant to lend.  It’s become important not only because the banks have reduced their amount of lending but also because the banks are now reluctant to loan as much of the purchase price.  For example, in previous years, if the buyer brought a down payment of 20 per cent the bank was willing to lend the remaining 80 per cent.

So the good old days are now behind us with the banks now preferring the buyer to bring a down payment of 20 per cent, the seller to carry a note of 20 per cent and the banks will then fund 60 per cent as long as the seller moves into second position.
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How do I know the value of my business?  The main starting point for business owners thinking of selling their business is a valuation.  Almost without exception, business owners think their business is worth much more than it really is, so a Brokers Opinion of Value helps the business owner understand the price at which the business will likely sell.

Just as importantly, it also gives me, the broker, a chance to look at the financial statements of the business to know what’s going on and ask questions a buyer will ask.  That is, the question I try to answer when putting together a valuation is “What will the buyer see?”  By asking this question, I can isolate the strengths and weaknesses of the business and provide an impartial view of the chances of the business actually selling as well as point out any potential deal killers a seller may not see.
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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.
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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.”
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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.
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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.
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