Is it time for an Exit Plan to sell your business? 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.
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What legal entity should I choose for my business? One of the questions I am asked from entrepreneurs going in to business for the first time is what legal entity do I think they should use. My suggestion is that they simply open their business as a sole proprietor and once the business becomes established, then look to research and understand the different options and their costs so they create the right legal entity.

For some situations there is no choice but to move to a specific legal entity. For example, if two friends wish to create a business and they want it to be a partnership, then a legal entity that serves that need is required. In other cases, some professions require a legal entity, for example, an accountant, attorney and a medical practitioner. However, for a retailer, distributor, restaurateur or manufacturer it probably does not have that urgency and can wait. Most small business owners believe they need the legal protection of a separate legal entity to protect their personal assets but you can solve this problem with a good business insurance policy; which you will need for your business anyway.
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What is the importance of Intangible assets When buying a business or selling a business? 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. READ MORE

What is your Disaster Recovery Plan for your business? Most business owners have or understand the value in business insurance. It protects the business in case an insured event happens and rather than the business owner wasting time and losing business by addressing the problem, the insurance company takes care of things. Business insurance makes good business sense.

A good form of insurance but one only the business owner can handle is creating a Disaster Recovery Plan. It doesn’t sound very attractive and it doesn’t sound like a good use of time but let’s consider the following.
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It is important to understand Purchase Price Allocation when selling a business or buying a business. 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.
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When most business owners decide to sell and they wish to be the one to start the process, the first and obvious place to start is with a business valuation. A business valuation gives the owner a reference point as to whether the price they hope to get for the business will be reasonable and/or achievable.

Some business owners choose the selling price for the business based on what they want in order to sell. They may have a certain amount of debt they wish to retire, money they need for retirement plus an ache that makes them think there business is worth a certain amount of money. Not a good basis for trying to convince a buyer about the asking price for the business.

Valuing your business using the “rumor” method.

Other valuation techniques include the “rumor” method. The “rumor” method is the price an owner chooses to use based on what he heard his friend sell his business. Rather than a friend, it could have been a competitor two counties over or something they read in the local paper. Once again, not a good method to use to convince a buyer on the asking price for the business.

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Successfully sell your business

Selling a business comes with many challenges.  The number one reason most transactions don’t close after a buyer and seller have “negotiated” a deal is that the landlord cannot come to terms with the seller and/or buyer.  The number two reason is that finance is not available.

Seller prefers cash

For obvious reasons, a seller prefers cash.  Tom West of Business Brokerage Press is a writer and analyst on small business transactions.  According to West, research shows that sellers receive a significantly higher purchase price if they decide to accept terms or carry a seller’s note.  Furthermore, on average, a seller who sells for all cash receives 69.9 percent of the asking price whereas if the seller is willing to carry some of the finance, the selling price will increase by 15.8%.  For example, if a business lists for $150,000, and the seller is willing to carry some finance, they will receive approximately $24,000 more than the seller who is asking for all cash.
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Tips to sell a business

Looking for some tips to help sell your business?  Successfully selling a business requires a lot of preparation, attention to detail and organization. Most sellers badly underestimate both what they need to do and what to do if a qualified buyer comes along. A good rule of thumb is that it takes about ten buyer inquiries to reach a potential buyer who has the qualification to buy the business. There is not a shortage of buyers; there is a shortage of buyers who have the right industry and management, a downpayment and good credit score and the most important ingredient of all, the motivation to move through the process to buy a business. So if you find the right buyer, you need to have you’re “A” game ready.

Here are 5 tips to help you prepare and be ready.

1. Assuming you know what the buyer wants.

Buying a business is a unique experience; every transaction is unique. If you meet a buyer with the right qualifications and assume you understand their needs, wants and motivations it is a bad practice as a smart buyer will not reveal their true motivations.
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Successfully sell your business

Are you trying to sell your business, and quickly? Check out these tips as they may help you achieve your goal.

1. Have a reasonable listing price.
2. Be prepared to negotiate.
3. Have a folder of information readily available for a qualified buyer.
4. Run the business as usual.
5. Make sure the business presents well; give it a “spit and polish.”
6. Get the business financial statements such as Profit and Loss up to date and keep them up-to-date.
7. Put together a current list of Fixtures, Furniture, and Equipment (FF&E).
8. Count all inventory so you know the value before you list the business for sale. This helps the buyer understand the final purchase price and reduces one of the many areas of negotiating a deal.

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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.
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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.
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Are terms of a deal important when selling a business or buying a business?   In the initial stages of listing a business for sale, all the attention is placed on getting the business in shape so it presents as strongly as possible, sometimes doing a business valuation to arrive at the most appropriate listing price for the business and discussing the tax implications to the seller of the business. Tom West is the owner of Business Brokerage Press and he has a great saying that most sellers and buyers don’t understand until they get into the negotiations of the transaction and it is – You name the price and I’ll name the terms.

In other words, price is important but the terms of the deal are much more important. And here are some thoughts why.

If a buyer made an offer for all cash and to close the sale in 30 days and another buyer made the offer subject to getting a loan and to close the sale in 60 to 75 days and you are the seller of the business, which offer would you want to accept? If they are both offering the same price for the business it would be a no-brainer to accept the cash offer.

Using the same scenario as above, but the cash offer was 5% less than the offer from the second buyer and you are the seller, which offer would you accept? Your answer would probably be – it depends. Some sellers may be willing to accept the cash offer and close the sale. Some sellers may be willing to accept the higher offer as the price difference of 5% could be more than enough to offset waiting 60 to 75 days to close the sale. Most sellers, I would think though, would include other factors into their decision. Which buyer do they think is more qualified to buy and operate the business? Which buyer would be able to get approval from the landlord to take over the lease? Probably the most important question the seller would want to know, however, if they accepted the offer from the second buyer, is what are the chances the buyer will get their loan application approved? If the seller is not sure the buyer would be qualified, taking the cash offer at a 5% discount may be much more attractive.
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Here are some tips to use to qualify for an SBA loan.  Obtaining finance to buy a business is particularly challenging. One of the advantages of buying a business in the United States that very few other countries have to assist with this process is the Small Business Administration or the SBA as it is commonly called. If you have retirement money in a 401(k) plan, this money can be used to move into a corporation and fund the purchase or down payment to buy a business. This option can be combined with an SBA loan. Both of these processes are very formal and deliberate and therefore take time, but if applying for an SBA loan is part of your business acquisition plan, consider the following 5 tips.
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What questions should I ask when buying a business?  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?
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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.
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